Cotton – A Potential Sleeper

Since reaching a high just above 90 cents/lb. in mid-August cotton futures have been on a downward trajectory giving up nearly 15%. In the March contract futures have found a value zone just below 78 cents where futures currently sit. I am operating under the influence the current base being built over the last two weeks will prove to be formidable support. The 13′ low may be in as we are starting to find some buying interest lifting prices from oversold levels. As of this post futures are trading above the 20 day MA, identified bu the red line in the chart below.

Futures have made their way to one week highs on some value hunters entering bullish trade and traders lifting short bets. The fact that we could see a smaller crop from China a major consumer…#1 in the world. Output according to the China National Cotton Reserves Corp. is 30.7 M bales, down approximately 5.5% from the USDA forecast earlier this month. Adverse weather appears to have effected yields. This increases the odds for a higher import number …a potential bullish catalyst. Demand in recent weeks from China for US cotton has picked up. The USDA reported net exports sales of 472,000 bales for the week ending 11/7, including 177,800 bales to China. During the prior four weeks China acquired 330,000 bales from the US. It’s all about supply and demand folks and if we see China’s appetite for US cotton return do not rule out a trade back tot the mid 80’s

Cotton Futures

Cotton Futures for November 20, 2013

Cotton Futures Trade ideas:

  • Long March futures and sell out of the money calls 1:1. 80 days until expiration. I see value and enough open interest in all strikes 80-84 cents.
  • Sell March 75 cent puts. Remember writing options bears unlimited risk. At current trade you are receiving $700 per. You are currently 4 cents out of the money and the current delta is 30%.
  • Ratio spread. buy (1) close to the money call option and sell multiple (2 or 3) out of the money call options. Look for the premium collected to finance a good portion of the closer to the money strikes. Be cognizant of the delta so you are not losing money in case we get a volatile move higher.

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As always, I’m here to discuss specifics and give guidance. Shoot me an email…Give me a call… you can reach me at: mbradbard@rcmam.com or 312-870-1653

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.
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