Repeating yesterday’s question, “So who wants to go short Cotton?”
Not me, I sure don’t! How about you? And this should be understood. Without willing sellers the market will remain vulnerable on the upside. If you looked at Tuesday’ price action you could see what I mean. In early dealings prices moved lower even though they had been supper strong the previous day. What made them weaker was the softer price action in the grains. As grains softened, so did cotton. I need not explain the relationship between cotton and grains and the competition for acreage line of reasoning, but grain prices then strengthened and wheat, as it has done with increasing regularity, returned to limit bid. Guess what cotton did?
The key here is why did wheat go limit? It’s pretty simple. Nobody it seems has a keen enough interest in selling wheat, (at least not yet), and certainly not in sufficient quantities to match the demand fund buying presents. In fact, there are stories circulating that natural shorts, farmers and such, are disposing of genuine and valid short hedge positions simply because they cannot meet the cash flow requirements of the ever increasing margin calls. (Now as an option trader I feel this is reason enough to promote owning puts instead of shorts, but that’s another story). The bottom line is this that the fundamental mechanism of the market place seems no longer capable of meeting one of its strongest requirements; that it be a forum for price discovery and a viable hedge vehicle for the agricultural user.
Is this situation going to broaden and impact cotton? I believe it has already. One need only take a look at the large influx of option trading that is being done by the trade. Commercials are doing more hedging in options than ever before. As a result volatility is increasing and so is volume and open interest in options. Increasing volatility means option premiums will go up, therefore I recommend owning cotton options. Sellers may see what appears to be a large premium, but option premiums are high for a reason.
In closing my comments tonight let me suggest that cotton prices are vulnerable on the upside, so when presented with a price dip buy it. Today’s action was such a case.
Si quiere más información, por favor contáctenos,
El equipo de Brokers de Futuros USA
Fuente: MF Global
©2007 Jurgens Bauer & Associates all rights reserved.
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