Cleveland On Cotton: Unusual Approach For “Bottled Up” Market?

Tractor lining up cotton modules during harvest. ©Debra L Ferguson

Another week, another view. Fundamentals appear to be little changed from last week. Week by week, export sales and shipments are poor, but prior-year carryover sales were so large that actual export commitments for the year are well ahead of the prior year’s pace.

So many curveballs. Every year is so different.

That’s why an active cotton market is the darling of Wall Street. The current price rally has now experienced some 15 trading days of holding near the four-month highs. However, loses hit the market this week and on very good volume with most of it coming at week’s end.

Sell December, Buy March?

End-of-the-week trading corresponded to the conclusion of the 3-day Jim Rogers long-only speculative trading rolls (sell Dec/buy March) – as well as the normal-end-of-the-month profit taking by speculators, and even the end of the month prior to a First Notice Day when some merchants require on-call sale fixations or roll to the next contract month.

The Goldman Sachs 5-day speculative long-only rolls will begin next week (again sell Dec/buy March). Whatever the reason, the market did have good trading volume, but prices slipped a bit.

Nevertheless, the current trading range should hold into the November USDA supply-demand report. The trading range, generally 61-66 cents, is beginning to look a bit stale, given the past 15 days consecutive days of trading in a very tight 75-175-point daily trading range.

It may give up the fight for higher prices, or it may have a knockout punch coming. I am, however, beginning to get a bit nervous.

Since the market has held this very tight range for three weeks, it has established a case for a trading strategy that can be employed a well-acclimated trade hedger. A seasoned cotton marketer may want to consider buying both at the money March call option and at the money March put option. (To reduce the premium, some may want to consider either a one- or two-cent out of the money option.)

Unusual Strategy For Stagnant Market

The market has demonstrated it is not willing to declare its future path, either higher or lower. Yet, it has shown that it is beginning to be “bottled up” and must move one way or the other.

Will it fizzle and settle lower back into the bottle, or will it bubble over and spill into higher prices? The market is clearly saying it has a direction in mind.

So, for those who can’t decipher the market’s direction, the strategy of using both a put and a call allows one to take advantage of whichever direction the market eventually decides to take. It is an unusual trade, but one that is not unusual when a market stagnates.

The rubber band has wound tight around the current trading activity and it is set to push in some direction.

China And Settlement: Piecemeal Approach?

Speculative shorts are exiting the market, but trade shorts are taking their place. Thus, the market appears to be flushing enough cotton out of growers’ hands to keep the supply pipeline satisfied. Merchants are not grappling for cotton, but neither are they receiving strong export sale orders. Domestic mills are very busy, but likewise, they are not having to scramble for cotton.

The Chinese trade dispute continues to be a long work in progress. The hype associated with a definite and declarative settlement is giving way to the realization that it will be a piecemeal project.

Too, it is very possible that the market premium associated with a tariff settlement has already been worked into the price of cotton.

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