Commodities & Futures

Update on Recommendations

2008-03-01T17:56:00.009-05:00

Here’s an update on the trades we’ve been looking at since the letter I sent you two weeks ago. Below is a copy of the letter with updated charts to show how the trades progressed. My new comments are in italics. Hope you find this interesting.

Here are also a few of the markets on our “radar screen” that we are monitoring for either current trades or ones we are waiting to jump into:

April Live Cattle:
April Cattle has been stuck in the lower band of a $98 to $91 trading range. We’re looking at selling $91 put options on this contract for a $300 to $400 credit. They expire on April 4. In addition, we would look to either buy the April futures or sell a $98 call option if cattle begins to move upward. Each $1.00 move in cattle is equal to $400 if you hold a futures contract.

We sold an April 91 put for a $380 credit. While we had some nice moves up for a few days in the past two weeks, the pricing of the 98 calls were not attractive enough to take. The cattle market looks to be consolidating, and most analysts are looking at the further-out months to look to get long as current inventory is brought to market. We are also looking at the further out lean hogs (June contract) to get long very soon. For now the April 91 puts have dropped to $240, giving us a nice profit.

May Orange Juice:
Orange Juice is one of the few futures contracts that are not experiencing insanely high prices. A strong supply of juice from Florida and Brazil, along with high prices at the store level, has kept the OJ contracts at depressed prices. We think commodity funds will be looking for more areas to put their money in, and OJ may be the next market to catch their eyes.

In addition, hurricane season is coming in just a few months. Florida did not have a single strong hurricane last year, but what’s the chance of that happening again? Hurricane scares often move the OJ futures contracts sharply higher. We are looking at a few ways to play this market:

First, we are looking at a bull call option spread in May OJ – buying the May 130 calls for around 4.75 cents ($712.50) and selling the May 140 calls for around 1.90 cents ($285) for a net cost of around $427 for each spread. There is good resistance in the 140 price range, and the options expire on April 18, so we have time for the trade to work out. Ideally, we’ll see a move back to near 140, then start moving back down. Cash out of the in-the-money 130s for about a $1,000 profit and let the 140s drop to around $200 or less and cash them out or let them expire worthless.

We entered the bull spread on the 20th, buying the May 130 call at 4.90 ($735) and selling the May 140 call at 2.15 ($322) for a net cost of 2.75 points, or $412. We almost bailed on the trade on the 22nd when the market took a huge slide down but waited it out. We’re nervous about today’s price action as the contract failed to close near the higher points in its range and that seemed to hit resistance at the trendline. We are now thinking the sell side of this market is the place to be near term (we still like calls in the further out contracts) and will look to bail on this position on weakness on Monday and switch to May 125 puts in the 3.75 point area ($562) or the May 120 puts for about 2.15 points ($322). For the current trade the spread has widened slightly and we’re up about $44.

In addition, if the OJ continues to fall, we could look at picking up some May 135 calls or 140 calls on the cheap, and maybe sell some further out calls or puts help finance the trade.
Next, taking a longer term outlook for OJ, we look at a similar trade with the July or September contracts and look for a hurricane play. A July 145 call is only about $450 now, with expiration at the end of June. September is much more costly with a 145 call at over $800, but it won’t expire until Aug. 15. Margin on an outright OJ contract is just under $2,000, so buying some longer-out contracts may also be a good way to go as we would not have to worry about time running out on the options.

May Wheat:
The wheat market, as well as corn and soybeans, have been crazy this past year. These markets have been so volatile it’s been hard to find logical entry points. We feel, however, that wheat is especially due for a correction in price. We don’t like stepping in front of moving trains, but we also can’t overlook that more money can be had on price drops as on increases.

We’re looking at a bear put spread for May Wheat – buying a $9.00 put for 27-cents ($1,350) and selling an $8.50 put for 17.5 cents ($875) for a net cost per spread of just $475. These options expire on April 24, so we have two months for it to work out. Profit potential is on the $1,500 range, so risk versus reward is good.

We didn’t enter the put spread last week as the market drifted sideways and failed to take out the more recent lows. Then the daily limit curbs came off and the wheat market went crazy! Once limits were expanded and margins increased prices started to fall, and we see $9.00 as being the next logical stop as wheat drives lower. We may have some bounces along the way, but we think $9.00 is a reachable target in the next two months. We entered this trade today, buying the $9.00 May puts for $17 cents ($850) and selling the $8.50 puts for 11 cents ($550) for a net cost of $300. We purchased just two sets for a cost of $600 as the margins on wheat will increase the further prices drop. At the end of the day we were up three cents on the spread for a profit of $150 each, a nice 50% increase for just a few hours!

Remember, as this is a debit spread we cannot lose more than the net cost of the options.

Coffee:
The coffee market is another that has experienced huge price movements recently. We’re looking for a pull-back into the 140 to 145 range to get long again, either with outright futures or options. Coffee should be a strong market his year as it is an “off” production year for Brazil, so supply could be a huge issue.

Coffee generally stays within a range of 120 to 150 most of the time, and we’ve been successful playing off those extremes with call option spreads and selling puts. If we can get the correction, we’ll be pulling the trigger to get long and ride another move to the 155 to 160 area.

Wow. Talk about a rocket of a market. We’re kicking ourselves for not just getting in long anywhere, but that’s not how we trade. Today’s trading action could be looked at as an “exhaustion” move as the contract jumped to new record high only to settle at the extreme low of the day. What I want to see are a few down days. Then I’ll draw a trendline down from the high. When we start moving up through that we’ll get long. Until then my long-standing phobia (and uncanny track-record) of buying the extreme highs will keep me on the sidelines for this market. Another possibility I’ll be sketching out on Monday would be selling out-of-the-money puts sometime in mid-March when the contracts have less than a month until expiration.

Other markets we’re focusing on this year will be the U.S. Dollar (long the index or short the foreign currencies); sugar on pullbacks and looking for weakness to get short gold, soybeans and crude oil.

We’re rethinking the above paragraph. We think the U.S. Dollar will bottom, but not until the mid-point of the year. We’ll wait until the June currency contracts are the lead to look at making a move here. We’re still bullish on sugar long term, and are considering a short on the May contract and a long on the October contract. As for gold, we got burned selling some calls last week with only a little time left and are now looking for a new pullback to get long. $1,000 gold is coming whether we like it or not.

The opinions contained within are those of the author and are not guaranteed. Always remember, there is a substantial risk of loss involved with trading futures and options. Past performance is not necessarily indicative of future returns.

High-Flyers of 2007 May See Big Drops in '08

2008-01-15T12:06:00.000-05:00

January 15, 2007

What goes up must come down, and the U.S. economy is certainly poised to see a slow-down this coming year. While many of the commodity markets have seen record prices thanks to a lack of supply and an increase of demand (such as grains), a slow-down from the world's largest economy will probably put quite a damper on these markets that ran out-of-control last year and could become very profitable for those traders looking to get on the short side.

Crude oil is one of the markets we see that should have a big breakdown this year. If the U.S. buys and consumes less oil, prices should fall. Reports have it that China is raising its interest rates to slow its growth, and it is also a huge importer of oil. Today oil is off about 3%, and we see it moving from the mid-$91 range down to the mid $80s, which should provide some support. We have been bearish on oil for some time as there is no reasonable reason why it has been priced so high.

Today we implemented a bear put spread on the March contract, buying an 88 put and selling an 84 put for a net debit of $1,050. Our greatest profit level will come in between $88 and $85. Our plan would be to sell the 88 on a bounce and let the 85 either expire worthless on Feb. 14 or buy it back if we think it will move back against us.

Wheat Play
We're looking at a similar trade for wheat, which has jumped 90 cents on the July contract (worth $4,500) in just three days! The old crop March contract, however, has barely budged, and we think it is poised for a fall.

March and July wheat are up about 10-cents each as we write, but are off their highs from this morning. We'll wait for a move down to jump with the flow and will look to buy a May 800 put for about $900 and sell a May 750 put for about $450 for a net debit of about $450. Like the oil trade, we will profit the most if May wheat drops under $8.00, but stays just above $7.50.

What Will Be Up In 2008?
We see a few markets that should continue their upward ways this year.

The U.S. Dollar, which has been beaten down to record lows, could make a recovery this year. We will wait, however, for the next FOMC interest rate decrease to measure how the market feels about the Dollar. If history repeats, the Dollar should drop if the Fed lowers interest rates (the Dollar will be less attractive for buyers as they will sell our currency and buy a currency, like the Euro, which has a higher interest rate). But history likes to throw curve balls every now and then, and if the economies in other countries start to slow, there could be a renewed flight to the Dollar since our down economy is already priced into the value of the Dollar.

The "soft" markets - such as cotton, sugar, orange juice and cocoa - are also looking attractive for a number of reasons unique to each product.

We like cotton because acreage is moving to other cash crops. It has had a huge increase in the past couple of days, and a pull-back should provide a new buying opportunity.

Sugar has also had a nice, measured run up and now in a side-ways pattern. We've been long the March 11-cent call for the past three months and are sitting on a paper profit of over twice our entry. We'll hold this for a few more days as expiration is closing in, but we're comfortably in-the-money and want to keep it that way. On a breakdown under 11.30 we'll get out, let it fall a bit, then get back in the May contracts at either a 12-cent or 13-cent strike.

We like cocoa also as supply appears to be tight for the rest of the year. On a sharp move up yesterday we bought a March 2200 call for $400, looking for the market to test the 2400 range and get out with a quick profit. Cocoa dropped a bit today, moving us just out-of-the-money, but we're confident there will be a push over the next week to probe new highs before this expires at the first of February.

Tomorrow we'll examine coffee and orange juice.

Have a great day, and good trading.

If you have any questions or comments please send me a note 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.

Three Top-Heavy Markets Looking Ripe for Collapse

2007-10-16T21:34:00.000-04:00

October 16, 2007

The crude oil market has still been on a tear, and from what we see it is largely fueled by the hedge funds. Chances of a hurricane hitting the Gulf area remains slim, and we are past the peak driving season and pre-cold weather, so without a catalyst for prices to keep soaring we are going to continue to predict a beat-down for this market.

We found this quote from our favorite energy web site, Zman's Energy Brain: "While I forecast that supplies will grow somewhat tighter in the next two months there seems to be little justification for oil at these levels. Even if there is a substantial draw down this winter the U.S. will very likely remain amply supplied with crude. Heating oil may be a different story and I believe the EIA's 28% YoY price tag growth for the 4Q is likely to be exceeded."

We are looking at the Dec. Crude Oil 78 puts, priced now at .51 ($510). Dec. crude ended the day at $86.56 per barrel, and if the short-sellers jump on board we can easily see a $6.00 to $8.00 drop in prices quite quickly.

Again, our plan is to wait out the Wednesday morning AIP/EIA Energy Stocks report at 10:30 am. If crude breaks down this time we're going to jump on this.

Soybeans Look Ready for Dip
The soybean market, like most of the grains, has been jumping all over the place. Recent reports of a possible drought in Brazil caused bean prices to jump over $10 per bushel, but that didn't last for long. Now, the news is that the Brazil drought won't be so bad. Also, reports of some smaller harvest yields have failed to move the market.

Like they say, a bull market needs steady news to keep it fed. We think beans will take a short-term drop to the $9.00 area, and we are looking at the Jan. '08 9.00 put. It's priced at 7.5 cents, or $375 per contract. This would give you a return of 3-to-4 times your investment if soybeans dropped to $9.00.

Top in Place for Canadian Dollar?
The Canadian Dollar also looks like it may have topped out, and we see some movement in the U.S. dollar index to the upside. The Canadian dollar is on the longest sustained run in decades and has yet to retrace any significant amount of its over 50% rally. We think it is ready for a fall back to the $1.00 range (it is currently trading at $1.0207). A Dec. 1.000 Canadian Dollar put is just $300, and it would also triple in value if the Canadian Dollar fell back to the $1.00 level.

Update on Orange Juice
We had an excellent payday from our OJ calls. We got out of one of the Nov. 140 calls on Oct. 10 at 7.00 for a gain over cost of $757.00. We punched out of our second Nov. 140 call on Friday the 12th after the OJ crop report came out lower than anticipated. The market was all over the place and we bailed at the close for just 5.00, a profit of $457 over cost.

Finally, we took profit on Monday the 15th on our Jan. 160 call when the market jumped back up, getting 5.50 for it, or $555 over cost. Not too bad for a month's worth of work!

We decided to get out of the OJ trade for several reasons. First, the Nov. calls were expiring at the end of this week. If they moved down and "out-of-the-money," or less than 140, then they would lose most if not all their value very quickly. Second, we got into the trade because we predicted Florida would get smacked by at least one hurricane in September or October. That never happened, so our reason for being in the trade disappeared.

We got lucky that the crop report came out last Friday with lower than anticipated figures, and that popped the market up to where we expected to take our profits. As they say: plan your trade and trade your plan.

We did leave some money on the table (a lot in the case of the Nov 140 calls: they traded up to 18.00 today, or $2,700.) That was painful to watch, but we were playing with fire keeping the Nov. calls so close to expiration.

If you have any questions or comments please send me a note 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.

Get Ready to Move on Crude Oil

2007-10-02T18:17:00.000-04:00

October 2, 2007

We got a bigger than expected head-fake in the crude oil market last week, and that kept us out buying the Nov. 75 puts we talked about on Sept. 25. At the risk of sounding like a broken record, we're going to wait for the energy inventory reports on Wed. at 10:30 a.m. If crude moves lower, we will get into the Dec. 70 puts (which settled today at .51, or $510 each).

November puts expire on Oct. 17, so the market will have to move down fast to make the trade worthwhile. We will therefore buy at least two of the Dec. 70 puts, selling one if Dec. crude hits $75 and keeping the second with a goal of it getting down to $70. For an investment of just over $1,000 we will be looking for a return of $4,000 to $5,000.

Grains Set for Tumble?
Wheat, corn, beans and oats all closed at or close-to limit down today. Some was profit taking off the incredible highs these markets have been seeing (in the case of wheat and soybeans), and a possible glut in supply in the case of corn.

Bill Zechmann, owner of Midwest Futures, came out with a recommendation letter yesterday suggesting the purchase of a Dec. 370 put and a sale (write) of a Dec. 400 call. Unfortunately, the market moved too fast today to get into the trade. When Bill wrote his recommendation you could have got into it for about $450 per contract. Now it would cost over $1,300! With corn dropping 20-cents today, you would be doing the money dance for sure!

We could still play this two ways: first, wait for corn prices to move up and make the spread a little more affordable. Second, since Bill thinks Dec. corn could drop back to the $3.00 range, a Dec. 330 put is trading at 9-cents ($450). These puts would almost triple in price if corn does indeed drop to $3.00.

Why are we bearish on corn? Big supplies and a higher yield as harvest continues throughout the country could see a much higher ending-stocks level than many experts originally thought. There will still be a big battle for acreage come next spring, and we'll quite possibly want to get back on the long side after this upcoming shakeout. For now, we think corn and wheat prices are set for a dramatic drop as the harvest season comes to a close.

Here is a link to a FutureSource story on corn: http://futuresource.quote.com/news/story.jsp?i=DJC00i7Y71002

If you have any questions or comments please send me a note 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.

Crude Oil Moving Lower - But Don't Jump In Yet

2007-09-25T18:28:00.000-04:00

September 25, 2007

As predicted last week, Nov. Crude Oil has begun a pull-back from record highs. But don't jump in yet.

Wednesday at 10:30 am EST is when the AIP/EIA Energy Stocks reports come out. Expectations are for crude oil to show an inventory drop of over 2.1 million barrels, which is usually enough for the market to see a slight price increase. This is the head-fake we're looking for. If prices move up a little, the put options we're eyeing will get a cheaper. But, if crude prices start diving after the report, jump on board and get yourself short crude futures or buy crude oil puts.

We like the Nov. 75 puts. They're trading at .67 now ($670), but they expire on Oct. 17. Crude will have to get into the money (come down to $75 per barrel) or very close to that price very soon. I think it can do it. If the crude oil market falls as I think it would (see the end of July), this trade will net from three to four times your investment.

Storms in the Gulf could force crude prices up, but they will have a very short-term effect on pricing. Overall, by Oct. 12 we think crude prices will be in the $75-range. If not, we want to get out of our puts or go flat if short the futures by that time.

Orange Juice Update

Our orange juice trade has moved into the modestly-profitable area. We have Nov. OJ calls with a 1.40 strike price and Jan. OJ calls at a 1.60 strike. OJ futures have moved up from the 1.25 area and are hitting resistance at 1.30. Without any hurricane threats, the market has been moving up mostly on technical buying and some concerns about diseases in citrus groves. http://futuresource.quote.com/news/story.jsp?i=DJC00fjY70925

I expect the OJ market to take a quick breather and probably settle back to the 1.28 area for the weekend. For prices to pop through the 1.30 area and get into the money for the 1.40 calls (which expire in just over three weeks) we'll need some pretty wild weather to hit Florida.

The Jan., calls have until Dec. 21 before they expire, so we can still benefit from some late October weather to allow us to hit our goal.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.

Irrational Crude Oil

2007-09-19T02:06:00.000-04:00

September 18, 2007

The crude oil market is once again acting irrationally. Goldman Sachs came out with a piece saying crude could hit the $85 to $100 per barrel point very soon. That alone is usually cause for us to take the opposite side and short this market.

Aat the end of July, I started writing about crude hitting new highs for no apparent reason. We said buy the 70 put options, and if you did you made a very nice return. We're watching for a set up to repeat this trade.

On Wednesday, Sept. 19 the API/Energy Stocks inventory report comes out at 10:30 am EST. There is a good chance the report will show a larger than expected draw down on crude supplies, mostly due to the Huston Ship Channel shutting down for Humberto last week. This could cause a one or two day spike in prices, followed by another sharp move down.

A 50% move down from today's high ($81.11) to August's low would place the Nov. crude oil contract in the $75 range. A Nov. put option with a $75 strike closed today at .83, or $830. If crude oil falls back to this price range within one or two weeks that option would be worth over $2,000 - a pretty nice return for a quick, short-term trade.

We are bearish on crude for these reasons: world inventories are high; the Middle East is relatively calm (Ramadan just started); there have been few storms to disrupt the Gulf shipping lanes and finally, we're winding down out of the gas-guzzling months.

What could mess up this trade: interest rates falling could give traders a reason to think we're suddenly going to start using a lot more oil since the economy will pick up the pace; a big hurricane hitting the Gulf or slowing imports from Mexico; Mid-East troubles and finally, hedge funds continuing to bid up the contract.

Irregardless, we want to buy our puts in the .70 to .80 range, looking for a first goal of of the market hitting $75, then $70. This should give us a two-times investment return on the first leg and a three-to-four times return if Nov. crude can get back to $70.

We are still bullish on natural gas and heating oil. Nat. Gas is a good seasonal play this time of year thanks to Gulf storms, and heating oil is expected to be in shorter supply this year, as we said in the "Battle for Acreage" post on Sept. 11.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.

OJ Trade Triggered; Storms Brewing in Gulf & Atlantic

2007-09-13T02:10:00.000-04:00

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.

OJ Trade Still On - Here's Why

2007-09-11T23:37:00.000-04:00

This from Dow Jones Newswire:

"The gains this week (in orange juice futures) have been attributed to technically linked buying, concerns over a tropical weather system in the Atlantic Ocean and media reports about citrus-greening disease in Florida, analysts have said. Short covering after FCOJ futures had fallen to 23-month lows last week was also cited for the gains.

"Traders are keeping an eye on a broad area of low pressure associated with a tropical wave about 1,250 miles east of the Windward Islands. Conditions appear favorable for development and the system could become a tropical depression within a day or two, the National Hurricane Center in Miami said. While the storm doesn't appear to pose an imminent threat to Florida's orange groves at present, traders will continue to monitor the forecasts for possible strengthening, a broker said."

I also saw a NOAA chart showing a new possible tropical depression in the Gulf of Mexico off Texas.

The Dow Jones story went on the say that "continued liquidation in FCOJ futures has finally taken speculators to a net-short position, the speculation and hedging report on Sept. 7 showed. Specs are net short by 813 contracts, or 2.9% of open interest, from being net long 1,238 contracts the previous week. With Monday's rally, open interest actually fell 27 to total 28,201 contracts, proving that the move was done largely on short covering." (My emphasis).

We are still looking at the Nov. 140 OJ calls (trading at 1.20, or about $180.00), and the Nov. 160 OJ calls (trading at .75, or about $113.00). However, these options expire on Oct. 19th, so time is running out. Unless the OJ market makes a big up move very soon, we're going to move out to the Jan. '08 options. The Jan. 140 calls are 3.50, or $525.00 while the Jan. 160 calls are 1.60, or $240.00. These expire Dec. 21.

If you have any questions or comments please send me a note 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.

Battle for Acreage

2007-09-11T21:21:00.000-04:00

September 11, 2007

Wheat, corn, soybeans and cotton will all be battling for acreage next spring as farmers try to decide which crop will provide them the biggest dollar return for their work.

This spring it was corn - fueled by record prices, falling ending usage numbers and strong forecasted demand, led by ethanol. But the farmers' dreams of $4.00 per bushel corn may be far in the past. Corn is currently trading in the $3.40 range, which is not bad considering it is usually in the $2.00 to $3.00 neighborhood.

But who can go wrong with wheat, now pushing an eye-popping $9.00 per bushel? Expectations are for farmers to switch their acreage in hopes of basically printing money. When farmers do this, however, it opens up a number of new trading opportunities.

First, there will be a shortage of corn, soybeans and cotton next year. The Hightower Report today released a special report called the "Battle for Acreage," (if you would like a copy send an email to davidbrown@midwestfutures.com). It outlined several trading strategies for the coming year. If wheat and cotton grab acres away from corn, we'll have a shortage of corn and soybeans.

Prices for 2008 crops are still a little too high to start trading. We'll be buyers on pull-backs, and would most likely use futures rather than options as the time-premium for the strikes we're looking at are almost the same as futures margins.

Crop Report Out Wednesday Morning
The World Ag Supply & Demand report from the USDA is due out at 8:30 am on Wednesday. There are expected to be few surprises. Corn yields are expected to up, which may depress corn prices for the short-term. Wheat yields in the U.S. are expected to be up also, but worldwide demand is expected to create one of the smallest ending stocks ever, pegged at round 373 million bushels (which sounds like a lot, but evidently is not).

Wheat may continue to rise, pushing above the magic $9.00 per bushel price tag and eyeing the coveted $10 club. Every single newsletter I read, however, says that this market has to start moving down as harvest gets more underway. Also, much attention has been shifted to Australia's drought in some wheat-growing areas (other reports have some areas claiming record production, however), and all eyes will be on if they get any rain in the next two weeks. Some weather reports say yes while others say it will not be enough to boost yields.

Anyway, I'm still jumping on Dec. '07 and March '08 wheat puts when this freight train finally slows down. I would also think about spreading, buying Dec. '08 corn and selling Dec. '08 wheat, but the margin is still higher than I would like (pushing $1,700 initial). Whatever happens, it should be an interesting day!

Heating Oil Shortage?
Saw a great story on zman's Energy Brain's website that distillates used for heating oil are at record lows. This coincided with the heating oil contract setting new highs. With several refiners getting ready for maintenance breaks, he does not see the supply pipelines for heating oil to begin filling very soon. We would be buyers of heating oil contracts (or call options) on the next pullback on this contract.

Hurricane centers say there is some new tropical storm activity, and this could help natural gas jump in price as well. As reported in the last post, we are very bullish on natural gas. The market is finally moving up off some severe lows, and a storm threat could be enough for our option contracts to see a nice pop.

If you have any questions or comments please send me a note 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.

How High Can Wheat Go?

2007-09-07T01:56:00.000-04:00

The above is a monthly chart of wheat prices going back to 1993. Notice the circle drawn around the (at the time) record high prices in the $7.50 range way back in 1996. Also notice how far and how fast wheat prices dropped through the floor. Are we set to repeat that same price action?

Quite possibly. Yes, there is tremendous world-wide demand for wheat, and that's set prices sky-rocketing to new record heights. The U.S. and Canada are among the few countries in the world that is experiencing a fantastic wheat harvest, and all the other countries are knocking on our door to tender purchase offers.

Once the buying is done and the harvest is complete prices almost always start falling. In the last few days there have been more stories that the wheat crop is coming in larger than expected, that Australia's drought isn't as bad as expected, and new seeding in Canada will be over double what it was this year. Therefore, I'm buying put options on wheat futures.

Last week we picked up a few Dec. $6.40 puts, and will adding more if wheat prices continue to move down from the highs. Wheat had two limit-up days this week, and finally profit taking and slightly bearish news sent prices downward Thursday, and in pre-market we're seeing prices down nearly four cents. I'm looking at all puts with a strike price from $7.00 to $6.40, and will also be looking at March '08 puts in the same strike range. These puts are quite a bit more expensive, but, like the Dec. puts, I'm looking for at least a five-time return on my investment.

The wheat market is still going to be a roller-coaster for the next month. I would not go short the futures just yet - those two limit-up days would have set your account down at least a total of $3,000 per contract - so options is the way to go. Strap yourself in - this is going to be a fun ride.

Energy Update:

Unless Israel goes to war with Syria, look for crude oil prices to come back down fairly quickly. There is still little in the way of hurricane news to disrupt pipelines. API/EIA oil, gas and distillate inventory data showed slightly larger drawdowns than expected, but that usually means next week's number will out-of-line the other way - meaning they will report larger inventories than expected, driving down prices.

I would still be a buyer of crude oil and RBOB gas put options.

For natural gas, however, I would start watching for signs of an up-move and look at going long or buying call options. Chesapeake Energy released a press release stating that it will cut production by about 6%. The company did not say why it was curtailing production, but the fact that natural gas is near its lowest point since September 2004 could have something to do with it. Look for other natural gas drillers to follow suit (just like the OPEC cartel!) With less natural gas being produced, prices will naturally begin to rise. Is it just a coincidence they curtail production as the heart of hurricane season arrives? Not likely.

I would look at the Dec. $9.00 natural gas call. It will set you back about $3,000, but the charts show $9.00 is a good area that natural gas was trading for the past few months. And, if it gets back to the $10 area, where it was during the early summer, you would make a very worthwhile return on your investment.

OJ Update

Nov. OJ futures set a new low on Wednesday, then bounced back to finish the day in positive territory. Thursday saw a slight up-tick, so we'll keep a close eye on this contract in case we finally found the bottom. We're looking at the Dec. 160 and Dec. 140 calls, which finished yesterday at .50 and .95 respectively.

I think a lot of the up-move was caused by the new tropical depression that is trying to form off Florida's northeast coast, but the maps show this would probably be more of a threat to New York than to the citrus groves.

If you have any questions or comments please send me a note 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.

Season for Energy Trades

2007-09-03T20:00:00.000-04:00

September 3, 2007

With Fall approaching, now is the time to look at the energy markets for some quick, short term swing trades. The crude oil, RBOB gas and natural gas contracts tend to be very volatile at this time of year, fueled mainly by the devastation hurricanes cause in the Gulf of Mexico and the Gulf coast.

Often, just the threat of bad weather will send energy futures climbing. But, just as prices soar at threats of production shut-downs, they also drop back very quickly when the pipelines start working again.

Swing trading these markets is not for the faint of heart. First, they move very quickly, often overnight, which means your protective stops may get run over and you're out a lot more money then you had planned on losing. Second, they're very expensive. Margin on one crude oil contract is $4,000. RBOB gas is $6,075 and natural gas is a jaw-dropping $10,125!

You can, however, get into the energy markets with mini contracts: oil is $2,025; RBOB is $3,375 and natural gas is $2,531.

We also like to use out-of-the-money options with strikes at areas we are looking for the market to turn. Yes, in volatile markets options tend to be expensive, but we also prefer them for money-management as our maximum loss will never exceed the price for the option.

As I write this, hurricane Felix is moving on a path just south of where Dean hit, and should cross the Yucatan and into the Gulf of Mexico on Thursday. Two weeks ago when Dean hit the Gulf, most of the Mexican oil pipelines shut down. As Mexico is one of the biggest exporters of oil to the U.S., we saw a drop in crude oil inventories with the Aug. 29 report. This caused oil futures to jump almost $2.00 per barrel that day, and prices are still hovering at their highest point since the second week of August. This map from the NOAA (http://www.nhc.noaa.gov/refresh/graphics_at1+shtml/205025.shtml?5day#contents ) show that the eye of Felix may not cross back into the Gulf, and it may weaken substantially. Our strategy here would be to short crude and RBOB futures or buy put options on oil and RBOB.

For crude oil, I like the Dec. 69 puts. $69.00 seems to be a good support level for Dec. crude, and prices quickly fell to that level two weeks ago when Dean proved to be not as devastating to the oil infrastructure as first thought. Remember, though, that the supply from Mexico will still be slowed, and the next week (after the API/EIA energy stocks reports come out on Wednesday) oil could see another big up-move. Protective stops are an absolute, and if you get a profit at your goal make sure you cash it in quickly.

We could also do the same trade with the same plan with RBOB gas. Using the Dec. contract we would short with a goal at 1.82, or buy put options with a 1.82 strike.

With natural gas, we're staying on the sidelines for now unless a hurricane moves deeper into the Gulf and threatens the Texas and Louisiana coasts. Also, reports show that we're sitting on record inventories of natural gas, and that's keeping prices at extreme lows, in the $5.34 area. Here's a link to Platt's, a company that publishes some great analysis on the energy markets: http://www.platts.com/Oil/Resources/Futures/index.xml .

We will keep an eye on natural gas, and look at the Dec. '07 or Jan. '08 for a possible call option trade. We'd be looking mostly at Jan. in the $9.00 to $9.60 strike range as many articles hint that natural gas could run back to the $10 area if a big storm hits the Gulf coast states.

OJ Update:

We still think buying some OJ calls will be a money-maker if Florida gets threatened by a big enough storm. Soon after our last post, a new report came out saying the OJ crop will be much larger than forecasted back in the spring. That sent futures prices back to their lows of the year. We'll keep watching this trade for the rest of the month. Nov. 160 calls are now at .50, or about $75 each before commissions. The Nov. 140 calls at now 1.55, or about $230 each, and that may be a more realistic goal as the contract is trading at 118.

As we write this, there is a possibility that a tropical depression is forming off the north east coast of Florida (refer back to the map above). We will keep a close eye on this.

Bill's Soymeal Recommendation:

I apologize that I haven't done more in talking about Bill's soymeal call option trade from the last post as my vacation got in the way. It has been a very fruitful trade for those who got in: the Jan. 250 soymeal call options have better than doubled in price to $12.85 as of this writing.

Wheat Poised for a Tumble?

I'm getting real excited that the wheat market is getting ready for a huge drop. It's sitting on record highs ($8.00 per bushel for Dec. '07). The last time wheat hit nosebleed altitude (back in mid 1996) it quickly dropped like a rock, making thousands of dollars for those who were short. I started to pick up some Dec. 6.40 put options late last week. Why the options? Because there is still a chance I'm jumping in front of a fast-moving train. There is still a lot of fundamental supply issues that could keep wheat at high levels, and the market has a habit of gapping up and moving over 20 points a day (each point is worth $50 - so that's a $1,000 this contract can move without batting an eye).

As I write this Monday evening, wheat has gapped up over 20 points and will likely continue to test its highs on Tuesday. Keep a close eye on this market: there are a lot of hedge funds who are long wheat, and another drop in prices could see them dumping their contracts and pushing prices back to the $6.00 level, which on the charts look to be a reasonable support area.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.

Crude Oil Trade Complete; Storm Brewing for OJ?

2007-08-13T22:37:00.000-04:00

August 13, 2007

We got stopped out of the second half of our Oct. Crude Oil 70 put options today when a price spike hit our stop at $1.50 for a profit of about $500. Overall we grossed about $1,300 on two contracts that cost us about $2,000.

As our risk was locked in at $2,000, the $1,300 return is less than what we like. We usually won't look at a trade with less than a 2 to 1 profit versus loss, and prefer our trades to have anywhere from a 3-to-1 to 5-1 reward. We're going to analyze this trade in more detail and report back on what we could have done better to have improved our return - or maybe it was a trade we just shouldn't taken and tied up capital that could have been used elsewhere.

Tropical Storm Watch for OJ
At the risk of sounding morbid, we finally got a tropical depression, but it's still too early to tell if it will of risk to Florida and its orange juice crop.

Judging by how the market reacted (a quick price spike touched the 135 mark for Nov. OJ, but the contract fell and settled down almost 1% to 130.50) it amy prove to be a non-event. Natural Gas did the same thing - spiking briefly on the news and eventually closing lower for the day.

The good news is the Nov. 160 calls have dropped to 2.65 each (just under $400). If OJ can drop back to the 120 area, we should be able to scoop up the 160 calls for about $300 each, which should be just before the September hurricane starts moving the premium upward.

For now, we're waiting.

Soy Meal Next on Tap
Midwest Future's owner, Bill Zechmann, has released a recommendation for buying soy meal calls as demand for hog feed continues to rise. We'll take a look at this trade in more depth next time.

In the meantime, if you have any questions or comments drop us 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.

We Get Our Crude Oil Drop

2007-08-07T02:06:00.000-04:00

August 6, 2007

As we expected, we finally got our big drop in crude with Sept. falling nearly $3.00 today. Worries about a slowing economy thanks to the sub-prime mortgage debacle continues to be one of the published reasons.

The real fuel for the fall, however, were the large long positions many hedge funds were holding. And they decided to get out big today. Remember, we are short-term bears on oil. We want to protect our profits on the 70 Oct. puts and step back to the sidelines for the next play. Besides, if the reason for price fall in crude was because of the so-called slowing economy, then why was the Dow up nearly 300 points today?

The plan: Our goal is still for crude to drop to the $70 level. Wednesday morning is when the weekly oil and gas inventory figures are released, and that day is often very volatile for energy futures. We recommend putting a tight stop on 70 Oct. puts. They ended the day at $1.88 each, so if you got in at around $1.00 you've almost doubled your money. Volume in the 70 Oct. put options is still brisk - nearly 700 contracts today - and this strike price has the most open interest of any Oct. crude put option. Place a stop on half your option contracts at $1.50 to lock in a profit if the market takes a big reversal Tuesday or Wednesday. Keep the other half of you contracts open.

When crude does hit $70 sell half your contracts and protect the rest with a modest stop-loss. Crude might continue down into the mid-sixties, or it may take a sharp bounce back up. If that happens, make sure your stop is at a level where you will get a nice return.

OJ Watch
OJ continues to drift sideways as there is no new weather news to roil the market. There is solid resistance at the 143 mark for Nov. OJ, but we're going to stay on the sidelines for now with this trade.

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.

Waiting for Energy Stocks Report

2007-08-01T02:21:00.000-04:00

July 31, 2007

This, from Zman's Energy Brain:

"Bullish factors include continued problems with Iran (production and otherwise), North Sea (CATS) and Mexico (Cantarell) production, Venezuelan labor difficulties and general mismanagement, rebels, terrorists and countries run by terrorists, hedge funds, potential world power leaders who want to steal oil company profits, the EIA, the IEA, OPEC etc.

"Bearish factors include a whole lot of oil in storage in the U.S., rising Angolan production, rising Canadian production (see yesterday’s post for an important caveat), the fact that Kuwait says they have double the reserves previously thought (100 billion barrels in my best Mike Meyers voice), deepwater GOM growth on the way, rising production from Iraq (fingers crossed on that one) and OPEC who never made their curtailment quotas, continues to slip in terms of sticking with them and has made dovish statements of late regarding their upcoming meeting in September (but seem to waffling on those comments this week).

"Early Read On Wednesday’s Inventory Report from Reuters and Bloomberg:
Crude: DOWN 1.1 million barrels,
Gasoline UP 1.3 million barrels. This would put us within a hair of the lower end of the five year band, a region we have not entered since early April.
Distillate UP 0.7 million barrels
Refinery Utilization: up 0.6% to 92.3% "

We're remaining short-term bearish on Crude, and still see is coming down to the $70 level within the next 30 days. Our strategy would be to wait for the Inventory Report. If Crude starts tanking, jump in on buying the 70 Puts, which are trading in the 90-cent range. If Crude takes off, we'll wait it out, and perhaps look for a new strike price when Crude eventually comes back down to earth.

OJ Watch
OJ's back to trading sideways. No tropical storm worries yet to give the market any jitters. We're going to keep watching this set-up.

Crude Oil Moves Down; Keeping an Eye on OJ

2007-07-27T01:28:00.000-04:00

July 26, 2007

Oct. Crude Oil ended the day down $1.50 after jumping to the $76.66 level before plunging in the mid-afternoon.

As we wrote yesterday, we like the Oct. 70 Crude Oil Puts. They were trading for just under $1.00 in the morning, but after the drop in crude's price the puts shot up, closing the day at $1.42 (so, if you bought in the puts yesterday morning your investment would be up about 40% by the end of the day).

This is from Zman's Energy Brain, one of the better energy-related trading blogs we've found:

"Oil Shot The Moon Yesterday [July 25th]. September crude jumped $2.32 to $75.88 as everyone dismissed OPEC’s recent benevolence (that was so Monday!) and focused on news that four fewer loadings from the Bonny platform in Nigeria would occur next month and the EIA bullish global demand sentiment. That’s just silly. Globex crashed shortly after the report and the market took off when it came back on line. There was little in the report you could call bullish but crude drove gasoline higher as well with RBOB ending the day up $0.04 at $2.0879. The downtrend remains intact there but crude seems determined to push on up for no more reason than traders want it to. Really silly action." http://www.philstockworld.com/zman/

MarketWatch gave as its reason for today's afternoon sell-off was a spill-over effect from the stock market's 300-point free-fall and from concerns that a weakening U.S. economy will result in less demand for oil. http://www.marketwatch.com/News/Story/Story.aspx?column=Futures+Movers

Smart traders don't follow silly action. While there can be many valid reasons for crude oil to continue moving higher in the long run, I have a strong feeling that it will bounce around for a while and fairly quickly hit our $70 goal. Then we'll wait and see if we get a bounce or another drop.

I think the trade is still valid. After hours as I write this crude is up about 50-cents, so I would wait for the puts to move back down a bit, maybe into the $1.10 to $1.20 area to take the trade if you missed it this morning.

Another trade we've been looking at is Orange Juice. We had planned on buying the Nov. 160 Calls in the 2-cent to 2.5-cents area in anticipation for a big run when the first hurricane appears. But, we've noticed that OJ futures have jumped about 15-cents since last Monday, and the Nov. 160 calls are now over 4-cents each (about $600 for each option).

We're going to research this trade some more and see if there was a good reason for the recent run-up or if we expect a pull-back that will allow us to re-enter at our original 2-cent goal.

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 of sale of any commodities.

Crude Oil Set for Short Term Fall?

2007-07-25T17:31:00.001-04:00

July 25, 2007

What we’re watching today:

Oct. 2007 Crude Oil (NYMEX) jumped $2.40 today to $75.80 per barrel, an increase of 3.3% over yesterday. What sparked the rally after crude’s three-day fall from the $76 level to $73?

According to MarketWatch.com, not much.

There was no news, and the morning’s inventory report was “fairly neutral, yet there’s a short covering of positions.” Other news pointed to a brief technical glitch that caused the CME to halt some trading on its Globex platform, allowing floor traders to run up market and trigger buy stops.

Crude has been on a steady move up since June, but strong supplies, a lack of tropical weather concerns and a fairly quiet Middle East may signal a short-term dip in crude is on the horizon that we can capture.

Buying the Oct. 70 Crude Oil Put option would be one way to take this trade, as we expect prices for Crude Oil to fall. Your loss would be limited to what you pay for the option (which today closed at $1.15, which would be about $1,150), plus commissions. Your goal would be to close out half of your position at the $2.50 to $3.00 level, and the other half around $4.00.

What can keep Crude rocketing up through the roof? Some reports say $100 Crude is not far off, but the driving factor will primarily be hedge funds and their hot money. But remember, while hedgies are quick to get on the bandwagon, they are even faster to get off. (Check your charts - remember the free-fall oil took last August, diving from $75 to less than $60 by October?)