Monday’s Down Move Began from Friday Option Play
Typically, when cotton options on ICE expire, options that are in the money, (even if by just one tick) get automatically exercised and become futures. When Friday’s option expiration occurred, somebody (perhaps more than one) decided instead to abandon 2,200 of their long March 6900 calls and to exercise 853 of their long March 6900 puts. This meant that close to 3,000 new long March futures were created. Now, while this information was known piece meal to those holding the other side, it’s doubtful that the market understood the full extent of the situation until early Monday, thus the lower opening.
Cotton prices dropped further once outcry and option trading got underway. Prices proceeded to hit a new low for the month and although there was a significant 100 point bounce off that new low, values closed down sharply. March was down 1.93 at 67.16 and December down 1.74 settling at 75.77. The influence of grains was felt as those markets too came under pressure. Wheat, (having new expanded limits) actually closed lower by 45 cents. But even so, cotton managed to close below important chart points and therefore set the tone for further pressured efforts as we move towards FND.
May cotton will likely take over the leadership roll this week as the active contract now that March options have expired and open interest levels are shifting. Besides, there are only 8 trading days left before First Notice Day (FND) in March. Of course, it seems December is the real leader and therefore the contract to watch. I have been suggesting that some kind of melt down possible, and this is a good start, but the grains need to show us what they can do. As I said yesterday, “This week should tell a lot about where cotton prices are headed.”
I think it wise to consider using weakness to initiate long call positions in December. It also might be appropriate to seek to sell some puts. I noticed that today July 66 puts were valued around 200 with July trading 7075. Receiving 200 points for July 66 puts appeals to me when worst case scenario means that I’d be obligated to be long July cotton at 6600, minus the 2200 points received for the put sale. In effect I’d be forced to own July cotton at a net of 64 cents. Not bad.
As I also said yesterday, “local option traders had been long March options (and thus long volatility and long gamma). Now that those positions have been eliminated, due to expiration, odds are good that long positions will be sought to replace those having expired. Therefore, I think it appropriate to watch for premiums to increase as option volatility begins to reflect the demand for the long side of options in the pit.”
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El equipo de Brokers de Futuros USA
Fuente: MF Global
©2007 Jurgens Bauer & Associates all rights reserved.
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