March 27, 2007
MAJOR ACREAGE REPORT FRIDAY MORNING
The USDA's Prospective Plantings Report will be released this coming Friday (March 30) at 8:30 AM before the cotton market opens at 10:30. As I noted in my last newsletter, I believe this report could indicate severe cut backs in cotton acreage, which could have a significant impact on cotton prices.
The following chart shows the Futures Open Interest in cotton going back 25 years. You'll easily note Cotton Open Interest (the total number of longs and shorts) has skyrocketed since early 2006 while cotton has basically continued trading sideways. To me, this record number of players dramatically increases the possibility of a large, potentially violent move. Whichever way cotton goes out of this almost 3 year consolidation, with record open interest (meaning there are 210,886 longs and 210,886 shorts), you should have a lot of people who are the wrong way and having to get out...perhaps at ANY price...as well as new players wanting to get "in" on whatever move may be beginning.
FOR EVERY ONE OF THE PAST 20 YEARS, FOLLOWING THIS REPORT, BEFORE EXPIRING IN MID-JULY, JULY COTTON HAS MOVED AT LEAST 4 CENTS AWAY (ONE WAY OR THE OTHER) FROM ITS CLOSING PRICE THE DAY PRIOR TO THE REPORT.
Looking at today's option prices, this looks like about as perfect a "2 and 1" set-up as you ever get...In other words, per those 20 years of statistics, you have the opportunity to put your money on the table, and if wrong, get it all back...and if right, make a (in my opinion) high multiple return on your investment.
My Basic Recommendation Ahead of the Report...
Buying units of 2 July 56 calls and 1 July 54 put currently costs about 4.5 cents total, or $2250.
IF I AM WRONG, and the "blast" is to the down side (I have been around long enough to know this could be the case), approximately a 3 3/4 cent down move should put you in a position to sell both the then more valuable put, plus the two less valuable calls, and recoup 100% of what you have on the table.
IF I AM RIGHT, and cotton goes on the upside, considering the circumstances, as I've said about 50 times, I think we will see much, much more than a 4 cent move, and the roughly $900 spent on each put will not be missed.
I also have to make sure you understand...If Cotton goes nowhere, you could lose your investment on both the calls and puts.
Here's the chart, the money, and the possibilities as I see them...
Believe me (if you dare), a 4 to 5 cent move is NOTHING in this market...And if this report is "disappointing", and tanks (it can) I fully expect to recoup 100% and reinstate the bullish position using lower strike prices...And if cotton is going up, I think it will far surpass the 65 cent mark I have noted on the chart...
Give me a call if you are interested...