February 16, 2015
This newsletter is mostly going to be just charts, numbers and option prices. I currently have four positions I strongly recommend taking and I DO recommend taking all four. To the question I frequently get, “Which one do you like the most?”, my answer is, “I don’t know. You never do. Pick just one and inevitably it ends up being the worst of the lot. The MATH says you DO THEM ALL.”
And believe me, I don’t say this just to generate more business. I think all four will hit big, and believe that all four have the potential for making heavy multiples of what you invest (or I wouldn’t be in them). At the same time, and simply as a function of the math, I know that it is quite possible I could be dead wrong in any three of them, and have only one winner…and still come out ahead…OR, I could have two, three or all four be winners which would obviously lead to quite large profits (This IS the most leverage you’ll find anywhere)…AND, just as obviously, I also know that all four could be losers and the losses could therefore be 100% of what you put on the table…BUT, the point is, I believe having all four on dramatically increases the odds of making money, and decreases the odds of losing it.
Sell the Dollar Index
Buy the Eurocurrency
IN THIS BUSINESS,
YOU BUY WHAT EVERYBODY HATES
When it’s there, it’s obvious, but it is generally one of the hardest things to do in the markets…to buy a market that is universally and unanimously being TRASHED in the media…And you have to be willing to do so when a thousand points of “logic” suggests you are an idiot to do so…But this IS what smart trading often involves. Very popular ideas always do seem to eventually lose a LOT of money.
If you don’t recognize that the Euro is the one piece of paper on this planet that perfectly fits this description, I’d suggest you save yourself some time and just delete this email right now.
BUYING THE DOLLAR (lately only described as “the Strong Dollar) is the most unanimous opinion in the trading world today. Stocks? Bonds? Energy? You will find a mix of bullish and bearish opinion…But the Dollar? ALL THE RHETORIC IS ON ONE SIDE OF THIS TRADE. The Euro? To me, it’s like the stock market in March, 2009…According to the analytic community, a total “no hope” situation.
Here are the same charts from last week but they DO illustrate my point that EVERYBODY is all over the long side of the Dollar and short the Euro…
Plain and simple, note on the lower section of this chart how “stratospheric” is the speculative long position, for both Large and Small Specs…And do remember, markets generally top out when you reach that point where anybody who would be a buyer, has already done so.
THOSE ARE BIG EXTREMES GUYS…
And here is a chart that indicates how many players are now actually on board with this idea…
Here’s the picture in the Euro…which is basically the same picture as above in the Dollar, only seen from the opposite side…
I don’t think the set up can be any clearer…The whole spec world is heavily long the Dollar and Short the Euro…and I don’t give a hoot about all the supposedly intelligent analysis you see “supporting” those positions. THIS IS A PIECE OF PAPER WHOSE VALUE IS MORE DOMINATED BY MOB PSYCHOLOGY AND MEDIA PERCEPTIONS THAN ANYTHING ELSE. This is just another market in the “game”. I say if you are long the Dollar here and short the Euro, you are going to lose a lot of money. I WANT TO BE ON THE OTHER SIDE OF THIS TRADE. BUY THE EURO, SELL THE DOLLAR.
Here is one way to go…
One market – Two approaches
Just Buy the idea that it WILL MOVE…
One way or the other
(It “always” does)
I stuck those quotations on “always” because there obviously is nothing that is “always” true in Futures. But the historical stats related to July Cotton for the next 5 months come about as close to “always” as you ever get in this business…And these numbers (table below) present some very interesting possibilities…
Make no mistake, for many reasons I think Cotton is an enormous buy here and fully believe this market has a great shot at the $1.00 mark before July goes off the board…but the historical action in Cotton going back for, really, as many years as you want to, suggests that simply owning units of 1 call and 1 put make a lot of sense if you want to do nothing more than have very high odds (in my opinion) of making 50% on your investment (as compared to shooting for much more on a straight up long position).
See the numbers below…They really do speak for themselves…Then take a look at the 2 different strategies outlined thereafter…
July Cotton – Total range, cents per contract, Feb 15 to expiration, last 20 years
IN OTHER WORDS, COTTON DOES MOVE…A LOT DURING THE NEXT 5 MONTHS…
A summary of those years?
What you see there is in only 1 of the past 20 years did Cotton have less than an 11 cent range ($5500 per futures contract)…and in fact, 17 of those years were 13 cents or more (often a lot more). What does this mean? Simply stated, it says that July Cotton doesn’t typically just lie there for the next 5 months…It implies that positioning for fairly substantial movement, up OR down, using calls AND puts, makes a lot of sense.
Here are some good questions: Do you want to be right? Or do you want to make money? Do you care which way the market goes if you can make a decent return?
The answers are obvious…or should be…The first thing everybody wants is to make money…So check out this option recommendation as a possibility…
This recommendation shoots for a 50% return on what you put on the table…with the bottom line being, per the price of options right now, if this year’s market even begins to resemble the last 20, you ought to be able to get it…
First note: If you sit on this position until expiration, and these options expire with July trading between 63 and 64 cents, you will lose everything you have invested.
On the flip side though, in this market that “always” moves, about a 7-8 cent move in either direction does give you the opportunity to sell one side and pocket 50% on your money…And this doesn’t say anything about what the other side is actually worth at that point OR take into account any added value for time value or volatility…Get the move in either direction and the intrinsic value of the options alone presents you with the numbers I’ve noted on the chart…So I shouldn’t need to say any more…except to say take another look at those historical numbers and make your own suppositions. I don’t think you will ever find any numbers better than this…An no, this DOESN’T mean this idea is a lock to make money but I definitely will take these sort of odds ANY time I see them…
And just for the hell of it, let’s say you just want 30% on your money? Here’s what THAT would look like…
Part of success in futures is just trade selection…Waiting for the best situations…I’d classify this as one of them.
And here is absolutely how I would position for the bullish move I am expecting…
While I do think the stage is set for a move towards the $1.00 mark that year, as can be seen on the chart, it wouldn’t take a move anything like that to make a pretty big return…And again referencing those 20 year stats, this IS the perfect situation to also use the 2&1 approach….
As I’ve often noted, writing these newsletters forces me to eliminate all the noise in my head (and in the markets) and get down to the basics…to try to coherently show you exactly what has shaped my opinion…and what DO I see as the potential…And what sometimes happens, as I stumble through this process of deciding what words, numbers, pictures and strategies should appear on your screen, is I OFTEN REALIZE THAT SOME TRADES DO HAVE GREATER POTENTIAL AND PROBABILITIES OF SUCCESS THAN I ORIGINALLY IMAGINED…AND MORE SPECIFICALLY, THAT SOME TRADES ARE FAR BETTER THAN OTHERS…And that is EXACTLY what I have “revealed to myself” with this Cotton idea. IT IS AS STRONG AS IT GETS. It makes me want to end this letter right now and go relax a bit on this extra President’s day off…instead of covering the Cattle and Soybean markets which I also definitely want to be in.
At any rate, this is what I conclude regarding Cotton…What REALLY makes the most sense is to do combinations of both of these ideas and treat them independently…In other words, do the 1 and 1’s and go for the 30-50% targets…But also, do the Long 2 &1 and go for the bigger hit...and know that, per all those historical stats, if I AM wrong, you have a decent chance to, at a minimum, not lose anything.
LIKE I SAID, I DON’T THINK THE SETUP AND THE NUMBERS EVER GET ANY BETTER THAN THIS…AND DEFINITELY ENCOURAGE YOU TO TAKE A HARD LOOK AT DOING SOMETHING WITH IT.
As I stated last week, it has been decades since I have seen the sentiment this bearish for Soybeans (and row crops in general). In spite of record demand, it seems the entire agricultural world is totally focused on the fact that last fall we harvested record crops (for probably the 75th time in the past 100 years…point being we HAVE to have record crops just about every year to keep up with world population growth), and analysts everywhere almost sound like, “Beans won’t ever go up again”. I’M A BUYER. I TOTALLY, TOTALLY DISAGREE WITH THEM ALL.
Here’s the chart that best reflects that overwhelmingly bearish opinion…
On the chart above, I just went up to $12.50 with respect to what the $10.40 call would be worth…but the contract high for July is over $13.20 and I would not be at all surprised to see it taken out as…It’s just the way this stuff seems to work…
And BE SHORT CATTLE
Both the Live and Feeder contracts
A story hit the markets Friday about 1 SINGLE MAD COW HAVING BEEN DISCOVERED IN CANADA…and the cattle market dutifully rallied some off the news. I think this is “garbage news” and exactly the type of absurd item that gets thrown out there (maybe planted or manufactured) to sucker buyers into a market that has most likely topped out for years to come. ONE MAD COW FOLKS…With the idea being, I suppose, that this one cow will create more demand for American beef or something…Ludicrous I think…but hey, these are the Meats. Anything can happen.
I REMAIN VERY, VERY BEARISH THE CATTLE COMPLEX. I CONTINUE TO THINK A 40-50% COLLAPSE IS NOW UNDERWAY.
I see the last month or so of sideways action as nothing more than a pause in a steep bear market…I would guess this pause has done nothing more than pick up a slew of buyers who are still trading last year’s bullish story…thinking the sell off is a wonderful buying opportunity…and my guess is they will ALL be severely disappointed…I see any down day now as potentially the beginning of some degree of straight down trading leg in a bear market.
On these next few charts, take a look at how the hog market has traded since last summer’s VERY bullish USDA reports when Hogs were riding the same bullish wave as the Cattle…I see the fashion in which Hogs have collapsed as something of a road map for how Cattle will trade in coming months.
Be aware that the Bullish USDA Hog report I reference came DEAD on the highs in Hogs last July...
Do you think ANYBODY in the Cattle business was counting on Hogs, a major competitor, losing 50% of their value in the past 7 months? I’d also add, none of those same people are expecting higher feed prices…And neither of these two fairly major factors are “friendly” to cattle prices (as I am)…nor will it “friendly” to ALL those cattle owners who bought animals in the past 3-4 months thinking “I can’t lose. The cattle numbers just ain’t there. Cattle are going to be good for at least a couple of years”. And that’s not imagined dialogue…I was hearing comments, everywhere, exactly like those just a few short months ago.
Ok that’s enough. I think these are 4 GREAT TRADES…and I don’t just sit here and throw out lines like that hoping it gets somebody excited. I believe it….So, If you currently have the risk capital, and do ever consider yourself a participant in the insanity (and leverage) of the futures arena, I HONESTLY DOUBT YOU WILL EVER SEE A BETTER COMBINATION OF MARKET SET UPS AND PROFIT POTENTIAL AS ARE REPRESENTED IN THESE FOUR MARKETS…PERIOD.
If you want to go, or even just tip toe, DO give me a call. As always, I may be dead, dead wrong, which usually means losing money, but I think the next 3-4 months look extremely promising.
Can’t put it any straighter than that…Take a chance. Pick up the phone.
All options prices in this newsletter include all fees and commissions.
All price charts use data from Interactive Corporation.
All other charts are derived from Commodity Research Bureau data.