In the last seven weeks sugar futures have advanced just better than 15% making it one of the best performing commodities in recent months. Earning bragging rights trying to keep pace with the stock market which as of this post is trading at fresh records highs. Friday’s action spurred by a fire at a warehouse in Brazil may prove to be an interim top as trade near 13′ highs were rejected above 20 cents in March 14′ futures. The overall fundamental picture though bullish does not merit sugar prices at current levels. A correction in the near term is how I would be positioning…which means lightening up on bullish trade or with small size establishing bearish trade.
Friday’s close was 3.25% off intra-day highs and we experienced a significant volume spike…two preliminary signs of an interim top. Volume approached 400,000 contracts on the session, which was the largest number of contracts traded in one session since 08′. The initial estimate is that 180,000 tonnes of sugar were destroyed but that only amounts to 5% of the projected 4M tonnes of a surplus for the year and we are expecting a bumper crop out of India and Thailand…all about perspective. If exports are disrupted in the next few weeks out of this Brazilian port this would be a bigger development but that does not appear likely at this juncture. Friday was likely an over reaction and will serve as an interim top. Use the Fibonacci levels and the trend line seen on the chart below to help navigate bearish trade or for levels to add length on bullish trade.
Sugar Futures chart for October 21, 2013
My stance is the sugar market will need fresh supply news to rationalize higher trade and even current trade. Let me be clear I remain bullish but think the market has gotten ahead of itself.
Trade ideas:
- Those in agreement looking for an immediate correction could purchase at the money December or January put options. December 19.50 puts currently intrinsic by 10 tics are trading just over $500 per, 26 days until expiration with a 53% delta. The 19 strike in January with twice as much time but 40 tics out of the money is currently at $475, the delta as of this post is 39%. Risk the entire premium paid looking to capitalize on a potential depreciation.
- Short March 14′ futures and sell out of the money puts 1:1. The trade has four months time though I think you are out of the trade in the next 2-3 weeks. Look to sell a put and collect ballpark $600-700 per. The delta should be approximately 40% so one should capture 1/2 the underlying move and have a slight cushion on an adverse move higher. On a settlement above 20 cents cut losses on the trade. Use the Fibonacci levels to guide you on your exit.
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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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