Cotton: A Potential Sleeper
Matthew Bradbard | Nov 20, 2013 12:14PM ET
Since reaching a high just above 90 cents/lb. in mid-August cotton futures have been on a downward trajectory giving up nearly 15%. In the March contract, futures have found a value zone just below 78 cents where futures currently sit. I am operating under the influence the current base being built over the last two weeks will prove to be formidable support. The 13' low may be in as we are starting to find some buying interest lifting prices from oversold levels. As of this post futures are trading above the 20 day MA, identified bu the red line in the chart below.
It's All About Supply And Demand, Folks
Futures have made their way to one-week highs on some value hunters entering bullish trade and traders lifting short bets. The fact that we could see a smaller crop from China a major consumer...#1 in the world. Output according to the China National Cotton Reserves Corp. is 30.7 M bales, down approximately 5.5% from the USDA forecast earlier this month. Adverse weather appears to have effected yields. This increases the odds for a higher import number ...a potential bullish catalyst. Demand in recent weeks from China for US cotton has picked up. The USDA reported net exports sales of 472,000 bales for the week ending 11/7, including 177,800 bales to China. During the prior four weeks China acquired 330,000 bales from the US. It's all about supply and demand folks and if we see China's appetite for US cotton return do not rule out a trade back tot the mid 80's.
Trade ideas:
- Long March futures and sell out of the money calls 1:1. 80 days until expiration. I see value and enough open interest in all strikes 80-84 cents.
- Sell March 75 cent puts. Remember writing options bears unlimited risk. At current trade you are receiving $700 per. You are currently 4 cents out of the money and the current delta is 30%.
- Ratio spread. buy (1) close to the money call option and sell multiple (2 or 3) out of the money call options. Look for the premium collected to finance a good portion of the closer to the money strikes. Be cognizant of the delta so you are not losing money in case we get a volatile move higher.
Target
Use the Fibonacci levels on the chart above to help guide you on exit points. Also, the light blue line is your 50-day MA -- just above 83 cents/lb is my ultimate target.
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