OJ Trade Triggered; Storms Brewing in Gulf & Atlantic

September 13, 2007

We finally pulled the trigger on the Nov. OJ calls, picking up some 140 strikes for 1.95 each (a real crappy fill that didn't get executed until the end of the day - even us brokers can get crappy fills).

OJ jumped in price over 4% thanks to a combination of a new storm brewing in the Atlantic (the creatively titled Tropical Depression #8) and the new hurricane Humberto (springing out of nowhere, it's about to clobber Galveston and roll up into Louisiana and Alabama. Some tracks have it possibly coming into Florida, but most have it staying north). Commodity funds also saw the recent lows as good buying areas and have pushed prices through buy-stops, while producers are looking for a better area to start selling.

Looking at the chart from the NOAA, TD #8 looks like it could make a direct line for Florida. Or it could veer off to the north, south, or dipsy-doodle under Cuba, sneak into the Gulf and come in though the back door. Who knows? But, the threat is there, so as traders we want to be on the right side of the market.

The Nov. calls we bought expire on Oct. 19, so we need this trade to get legs soon for two reasons. First, time decay starts to take a bigger and bigger chunk out of the option's value as we get closer to expiration and are still out-of-the-money. Second, the USDA is releasing its projections for the 2007-2008 crop on Oct. 12, and it is expected to be higher than what the trade would like. This has the possibility of making for a volatile week. I would rather be sitting on the sidelines counting my earnings from this trade instead of being in it that late in the game.

This is also a good time to look at the natural gas trades. NG was up about $1.00 yesterday, and Humberto and TD #8 will certainly cause prices to continue to climb in the near future. We were suggesting put options on RBOB gas, but Humberto could cause some refinery disruptions. RBOB Oct. futures jumped back over $2.00 per gallon on Wednesday on these fears.

Finally, crude oil jumped for no apparent reason after OPEC said it would be raising its quotas. But, as zman's Energy Brain reported: "So why the early price uncertainty… The early uncertainty was the apples and oranges nature of the statement. In true Fed-fashion the powers that be in OPEC confused everyone. "500,000 that's built in, let's rally this thing" warred against "1.4 million! Holy Crap!"

…Followed by the spike into the close? Ultimately traders went for the record after the close, deciding that OPEC wouldn't be able to meet the additional 0.5 million by in a little over a month and a half. At least these are the current theories out there. Oil closed at $78.23, a new record for a front month NYMEX contract.

I think we test $80 soon. It of course depends on a variety of factors including the inventory report and what the IEA has to say about global oil demand in its report today, but I think we're going to knock on $80 and then fall back into the mid to low $70s over the next few weeks."

I might be looking at Nov. or Dec. crude oil puts in the $70 strike-price area very soon. Should cost in the $1,000-range.

Wheat (Finally) Tumbles

So the USDA comes out with its new crop production and supply demand reports. This country is about to become swamped in a sea of corn. So what does the market do? Push prices higher by 15-cents per bushel. Wheat supplies are reported to be so tight that we'll have near record low ending stocks and the wheat market does what? It ends the day down 30-cents. (Great for us since we have wheat puts, but very unexpected).

Why the wacky price movement? Fingers are pointed at soybeans, which we think are slated for the $10 or higher point very soon. The USDA says the crops are coming in with less yield than expected, Brazil is having issues with it's crop, and acreage is being taken away from soybeans in favor of corn and wheat.

If we can get the May '08 soybean contract to come back to the $9.20 area, we will take the latest Hightower Report recommendation and buy, with a goal of $10.23. They suggest a stop at $9.04, which equals a risk/reward of $800 to $5,000 (or a ratio in the area of 1:6, which is what we look for in a good trade.) Initial margin for soybeans is $2,430, while the mini-soybean contract is $486.

In the meantime, we will continue to monitor the wheat market and pile up on puts if it keeps sliding down.

If you would like some of the other recommendations from the last Hightower Report, send me an email at davidbrown@midwestfutures.com.

Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.