OJ has been trying unsuccessfully to break through resistance for some time now. We have already seen a substantial rally in the OJ market and just like the stock market a healthy correction is needed. Notice on the left side of the chart below all the gaps that this market left many months ago. Any seasoned trader has heard the saying that “gaps are always filled”, and we believe that the filling of these gaps is coming.
One of the reasons for that expectation is the Commitment of traders report shown on the bottom of the chart below. The red vertical bars on the bottom of the chart represent the commercial traders in this market and you can clearly see that they have a very large short position in this market. If we use the recent past as a guide, the last time we saw them build a position of similar size the market fell down by over 20 points in a matter of days. This trade is simply a low cost way to position for the pullback that we expect is coming.
click on the chart to enlarge
Buy May 2007 Orange Juice 1.90 puts for 2 points ($300) or less to open a position.
Or profit goal would be a move back below 1.80. If we meet that objective the profit will be 8 points ($1200) on our $300 risk giving you 4:1 on your money. Our break even point assuming a 2 point fill is 1.88 so any move below that would result in a profit.
Max risk, before commissions and fees, and assuming a 2 point fill, is $300. This occurs at expiration with OJ trading above 1.90.
Odom & Frey
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