Following five consecutive days of lower prices, cotton futures spent the entire day today on the plus side, then closed strong with Dec settling at 5016, up 79 points. Yet, the feature seemed more focused upon the Dec/March spread, which narrowed in on spec and option related selling. Locals and the trade were seen as scale down buyers of the spread.
Sources spoke of little business overnight in the cash market, yet prices opened higher with bids in December strengthening as the open approached. The result was that December opened at 4965-4985 and reopened as high as 4990. The reopen saw good volume, with friendly option action. Then as trading slowed, December stayed in a tight range, but with Dec making an effort at testing unchanged before the first hour was over. It held 4945 successfully and a return to the highs was next in store
Up till that point option volume had been constructive, with a fund seen rolling March puts into July and one merchant buying 200 March 56/57 call spreads for 30 pts, while another bought 100 March 46/50 call spreads at 262. After Noon the pace picked up in options and spreads while futures continued to move sideways between 4990 and 4950. Size traded in what appeared to be a major merchant rolling option positions. First some Dec 54/March 52 spreads traded, then the Dec 51/March 52 put spread went at 7 points and then the Dec 54/March 57 call spread traded 80.
These trades prompted option locals to sell Dec/March and that selling pressure in turn caused the spread to narrow in. Dec/March had just traded 345 and then moved in quickly to 330 and 325 where volume changed hands. The spread found good buy interest from locals along with members of the trade making 325 the low. Later another round of option spreading with the focus upon the calls took place as that same Dec 54/March 57 call spread was sold for a credit of 85 and perhaps 90.
The impact of these options trades was obvious in that it tended to narrow the Dec/March spread. The trades were thought to have been accomplished as a prudent rolling of long December puts into the later month of March. The same may have also been true regarding the Dec 54/March 57call spreads, which were larger in scope. They too were thought to be the shifting of positions out of short Dec calls and into March. Yet, a taste was left in the ring as to whether this maneuver also helped provide an opportunity in the spread. Regardless, open interest figures will likely confirm.
Exports are due out in the morning. A strong report doesn’t seem likely at this point, but that is still the missing element. There are reports that Pakistan’s crop may fall short of the estimated 13.82 million bales, due to bad weather and pest infestation, officials will spend the next 10 days completing a reassessment. There is talk that their crop could be closer to 12 million. Yields are coming in better than many had expected as the US crop gets harvested. The USDA is expected to increase the Chinese stocks when that comes out a week from tomorrow.
We’d like to hear from you. If you are trading cotton, why not give us a call at (212)-748-1388. We do not administer accounts, we simply execute orders. If you are a CTA, IB, or CPO, once executed your customer orders will be capably allocated and the fills directed into the appropriate account at your clearing house. We specialize in “give up” business.
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Jurgens H. Bauer
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