OJ Trade Still On - Here's Why

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

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?

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

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.

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 Trade Complete; Storm Brewing for OJ?

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

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

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.