The pre-opening this morning greeted traders with what looked like firmer prices as some size buying was announced early. This buying seemed to come from mixed sources, with trade participation perhaps coming as the result of business occurring in the cash market over the weekend. Prices did open about 30 higher with May futures approaching 5300 when the bell rang. That was up from Friday’s closing price of 5265.
On the re-opening May traded above 5300, not so much on additional aggressive buying, as much as due to a lack of selling pressure. Remember, recently there has been aggressive selling from specs on strength and this just didn’t seem to be the case today. Once May edged above 5315 some light buy stops were elected causing a further run up in price, but when May reached 5335 it stopped. May then dropped back to 5300, which didn’t hold, and subsequently to 5280 which did. From there a minor bounce occurred, but the focus of traders switched to the May/July spread and only the May/July spread.
With the expected rolling of positions out of May and into July under way, anticipate traders to focus on this event by transacting mainly in that spread. This was certainly the case last Friday and again today and probably will be for the next two weeks. That spread began trading at a difference of 175/178 points this morning, and may have traded down to 173, but it widened steadily as speculative hedge funds moved their positions forward. The spread widened out quickly to 190 and then eventually to 193 and 194 where volume changed hands. There didn’t seem like much interest in selling the spread until that point.
As I mentioned in Friday’s comments there is talk that the differences could widen out to 200. There was more such talk today and with good reason as the spread moved easily out to 191. Most of the volume in today’s trading was also oriented towards that spread, with certainly over 6,000 outright spreads trading and numerous local traders legging into and out of the spread. As the close approached, prices softened with the May contract making a new low.
However, once the bell rang size was announced as prepared to buy May and sell July on the close. Now, ordinarily one might suspect that this was in an effort to narrow the spread, as it had come in to 185/190 and may have actually traded 180, July premium. However, this desire seems rather to stop contracts in the outright months, as it is expected that large positions will wait until very late on the close to get rolled. Therefore, most of these announcements get cancelled if unable to be stopped prior to the actual close. Don’t be surprised to continue to see this style of tactic used on subsequent closings. For whatever reason some large positions seem to be rolled as outright positions very late and this situation may very well take place 7 out of the next 9 days. This is what caused the settlements in May and July tonight, while the spread was 185/190 and may have actually traded 180 on the close.
Options were quiet. The main featured trade was the purchase of about 400 July 54 puts for 190-205, maybe 210. Although, some size was also bought in the May 51 puts, early and late.
The market is still in a down trend, but the focus of trading will be upon the May/July spread, with possibly other spreads too receiving some attention. Independent of any new news, it’s entirely possible, (and likely) that prices will move sideways during the next two weeks, or at least until the open interest level in July exceeds that of May.
By Jurgens Bauer PICO Cotton 212.748.1388
Your comments are excellent, as always. With all the May/July switch activity, I am wondering whether you are seeing any clues as to possible deliverers or stoppers of May futures.
First, I’d like to thank you for your kind response. I certainly appreciate such comments, especially when they come from someone like yourself who is so well respected, and rightfully so, in our industry. As for your question regarding delivery, “With all the May/July switch activity, I am wondering whether you are seeing any clues as to possible deliverers or stoppers of May futures.” Let me attempt to answer it this way.
Regarding the status of delivery on the May contract. There are some who believe that the same major Memphis based merchant who stopped the March contracts that were delivered may be intending to re-deliver against May, (or perhaps wait until July). There are others who believe that the cotton positioned in certificated stock is there to potentially help keep a lid on prices. There is yet another school who believes that with crop problems expected in Texas, that the cert stock is being held to insure that appropriate growths are available to make good on commitments normally expected from the Texas crop. I could go on as there are a plethora of other thoughts as well.
As for me, I expect that as much cotton as possible will find a home abroad in a response to the pending elimination of Step 2. So between now and say the end of June, I expect to see great export numbers and a lot of cotton being shipped. That being said; let me continue.
The delivery game is a difficult one, especially since it can dominate the late activity in spreads involving the soon-to-expire front month. I suggest that anyone who is willing and decides to take delivery does so with a solid sense of knowing what they’re going to do with it. So, I suspect that there is a good chance that any cotton that finds its way to the NY board it will already have a home in the strong hands of who ever decides to stop those contracts and take delivery. Otherwise, it could tend to put a major damper on values.
Now, how much will find its way there is difficult to answer. I can suggest that the spread difference seem larger than my earlier estimated cost of carry, at least when the K/N widened out to 190+ the other day. Although at the same time I’m aware that there is a sizable quantity of certificated stock that will incur penalties if it is delivered. So, that suggests that the differences could truly be somewhere between 210 and 250, if those growths are in fact delivered. The K/N spread did narrow in a great deal during today’s trading, but that doesn’t mean it cannot just as easily widen out again.
However, as you suggest, by following the K/N spread and making an educated guess (shall we say) upon who is holding what, leads me to suggest this. At present, it looks as though the threat that K will be delivered is real. And since there has been a reluctance to aggressively sell the spread (selling July and Buying the May) as of yet, there is still no clear strong stopper yet identifiable. One key will be to watch for whoever might choose to step up and aggressively sell the spread. Action of that sort might suggest that that party may be positioning to accept delivery.
As for the delivery side, that too may change a few times still prior to First Notice Day, based upon what differences prevail in that spread, as well as others. I suspect that a decision will be made mainly based upon the spread differentials, but also upon developments in the cash market. Since I am on the trading floor and not actively involved in the cash side of things, the view I have of the portrait being painted is limited to only that portion of the canvas.
I hope that this effort to respond is greeted within the same spirit it is written. Please give me a call and we can discuss it further as well as keep one another posted on developments. Jurgens