Cotton:
Cotton still staying around the 102 mark. Sentiment has really changed. The steam for the rally has temporarily run out, due to a combination of factors:
-India announced crops are a lot bigger than they thought.
-India stopped flip-flopping on whether or not they would hoard all their sugar longer to make sure they had enough for themselves. Now they're all like, "don't worry guys, we'll let you have sugar starting Nov.1.".
-End of quarter, so hedge funds who made a killing on the run up were booking their profits.
-Chinese traders are going on holiday Oct.1 - Oct.7, so trading is lightening up.
The price still seems strong though, as it can't seem to break below the 100 barrier. I had an order in to exit my 120 calls at my entry price (0.60), but they still traded around 0.79-0.94 today. I may try to exit again in the morning, unless the futures drop below 100, then I'll wait until next week.
Sugar:
Huge drop in sugar, so I've already made 30% of my premium on my 35 cent calls. I feel quite safe in this trade now. News is out that the crops are going to be huge next year (I thought that a year ago, when prices were high and everyone was planting tons of sugar, everyone knew this would happen... I guess the weather still had to be good though). The futures rarely lie -- the futures being in backwardation foretold that this would occur. Easy trade, easy money.
Natural gas:
Okay, I'm all ready to *buy* a natural gas option as I mentioned before. Thursday's storage report showed higher than expected storage numbers. Storage levels are not quite as high as last year, but still way above average, and demand is still low. Futures price has dropped to 3.85 and is equivalent to the spot price -- no premium built in. I should buy right now, but I'm going to wait until Monday and buy if the price is still this low or lower - I'm hoping the price will drop to 3.50, but I'm afraid a rally will start anytime. The odds are good that the big funds will all be buying as usual in October in preparation for heating season when demand picks up. It's a bit of a gamble trade for me as I'll only have about 3 weeks until expiry on the options. The 1 ATM options will cost about $2000, and the futures price will have to rise 0.20 in those 3 weeks for me to break even. Then it's about $1000 in gains for every 0.10 rise in price ($10,000 for a $1 rise). I'm pretty sure that near the end of October, NG will be above $4, so I think it's a good "gambling" trade.
4 comments:
That NG trade sounds pretty bad. It has to rise 8% in just 3 weeks for you to simply break even? In fact, if it rises 7% in 3 weeks, you lose 100%. 3 weeks isn't nearly enough time. Terrible trade in my opinion.
Don't compare this to any random stock option trade at any random point in time, where yes, 3 weeks to go up 8% would normally be a dumb trade.
Due to the seasonal nature of natural gas, there is a very high probability that the price of NG will increase before the end of October. This happens at least 70% percent of the time. I'd say it's even more likely this year since the price never rose in September this year like it often does due to the weather/hurricane threats. Often a jump in price occurs right at the last week of October (which is why I wish the options had 1 more week in them)
This behaviour of NG is so common that it is already priced into the later futures contract months. So yes, I would love to go with the next contract month (Dec) to give me more time (7 weeks vs 3), but the price on those futures are much higher, such that NG would have to go up 55 cents (15%) from its current level for me to break even on ATM options. Due to the current downtrend in NG, the closest month (Nov) futures don't have any increase priced in (i.e. futures price = spot price), so there's only the time premium: about 18 cents on the ATM options.
[I should mention that if NG does keep dropping, I may indeed buy the Dec options as a winter rise in price will be even more likely.]
Yes, I totally recognize that this is a gamble trade because of the short time frame and current downtrend in NG. But it's not a *terrible* trade. It's a one-off trade where I'm playing the seasonal odds. Plus, I'll only be risking 1-2% of an account that is up 90%.
If it has such a high probability, then that would be priced into the options contracts that you want to buy. Yeah, you might get lucky and make money, but I think the risk/reward just isn't that good.
Yeah, you're probably right :)
I have to time the bottom of the current slide for this trade to work well anyway (or to work at all). I should just stick to option selling :)
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