Update on Recommendations

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

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

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

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

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.

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.

Irrational Crude Oil

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.

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.

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.