CottonCotton prices have surged in the past week on the USDA’s projection of reduced acreage for 2008. As we mentioned in past reviews, cotton is locked in a battle for acreage with wheat, corn and soybeans. Cotton and wheat appear to have gotten the short end of the stick as initial projections show cotton getting only 15 million planted acres in 2008, compared to 19.03 million in 2007 and 21.59 million in 2006. Additional concerns over crop problems in China and India have combined to drive cotton prices to four and a half-year highs. We still like the long side of this market but volatility makes us wary of selling puts with steep technical corrections always possible. We’d advise standing aside and look at technical breaks as opportunities for writing distant put options beneath the market.
CoffeeSpeculative and Fund buying have continued to drive coffee prices higher this week as Vietnam tests the market to see how much roasters will pay. Tuesday’s reversal may be a sign we are reaching the tipping point but we are not ready to tempt this bull with only one day down. Follow through selling would convince us that a near-term top is close at hand. Prospective call sellers should show patience. Good call premium should be available for some time in this market as volatility is near multi-year highs and should stay in the market for awhile. The expected monster Brazilian harvest will not begin arriving until May but it remains on the radar screen for traders of this market and should provide the longer-term fundamental set up for call sellers.
CocoaCocoa continues to climb on a lower U.S. dollar and dry weather in West Africa. Prices have been acutely sensitive to new crop development as cocoa beans from the previous harvest are nearly gone which pins all hopes on new crop cocoa supplies. Analysts are already starting to reduce projected crop size based on the weather problems. Approximately $100 of the recent rally can be attributed to manufactures buying on the board as processors have been scared into putting long hedges on in the market. We continue to see pullbacks as put selling opportunities as prices should continue to trek higher through the first half of 2008.
James Cordier and Michael GrossLiberty Trading Group(800) 346-1949www.optionsellers.com
James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing in managed option writing portfolios. James’ market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News, Bloomberg Television News and CNBC. Michael Gross is an analyst with Liberty Trading Group/OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.
The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.
