Adverse price movement can affect exports levels in commodities. In other words if prices are low enough it may entice higher exports while prices appreciating too high have the ability to discourage exports. Cotton futures are flat today as of this post unable to make it to the previous session’s highs. Net export sales for the week ending August 8th were 38,502 bales, less than half the net sales for the prior year for the same time period. One trader was quoted today saying” that cotton is up in a price range where it’s too high to make export sales.”
In the last eight sessions December cotton futures have rallied just over 8% to lift prices above 92 cents and their highest levels in 13’. It had been 16 months since December futures had traded at these elevated prices. They say a rising tide lifts all boats as Ag has rallied in recent sessions granted corn, soybeans and wheat from extremely oversold levels. Cotton had a head start as futures had not got hit like the aforementioned Ag commodities trading mostly sideways for the prior 6 months. As one can see on the chart below the trend line (blue line) was challenged on several occasions in recent months and held on all attempts. My take is once we trade south and close below the “breakout level” (red horizontal line) we trade back towards the trend line.
And now for the trade…
Two cotton trade ideas:
- For aggressive traders one could get short future and sell (1) put option as a hedge. Current futures price is 91.50 so if you sold a just out of the money put, say 91/90 strike you would have a 3.50-4 cent cushion which gives you $1,750-2,000 of protection. The deltas come in at approximately 45% so you would realize roughly half the underlying move. The time window is just shy of 3 months but I think you could see a trade back to the trend line near 85/86 cents in the coming weeks.
- My favored play is back ratio spreads in December. Today for clients I sold (1) 91 put and bought (3) 86 December puts and paid 2 cents or $1000 per strategy. You have a positive delta of 44% as of this post. An ideal scenario because you are long multiple legs is a volatile trade lower. If futures move higher as opposed to lower you have the option of buying back the 91 leg…which in theory means you are increasing your exposure to a losing trade. A trade back to the 50 day MA puts future back near 86 cents and should put this strategy in the green as long as it plays out in the coming weeks.
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