March 29, 2015
This trade is only a bet that Cotton will go up OR down.
All I want is a move that has taken place in 18 of the past 20 years.
If we get it, it should produce at least a double on your money.
I do not care which way Cotton moves. Either direction will work.
With this new “1 & 1” in mind, as I was researching possibilities in the markets I am currently recommending, I uncovered some astounding statistics in Cotton. As I have pointed out for many years, Cotton, between now and expiration of the July contract, has a history of repeatedly making some quite large moves…and as I was researching those histories, and working out the costs of various 1 & 1’s relative to what I thought cotton could do during the next 3 ½ months, I suddenly realized that, PER THE PAST 20 YEARS OF TRADE IN JULY COTTON, IF USING TODAY’S CURRENT OPTION PRICES, THE TRADE I AM RECOMMENDING HERE WOULD HAVE HYPOTHETICALLY WORKED FOR AT LEAST A DOUBLE (OR SOMETIMES MUCH MORE) IN 18 OF THE PAST 20 YEARS.
Before going any further, I definitely need to state that just because something would have theoretically worked 90% of the time does not mean it will do so in the future. However, it does suggest that that if you do take this position year after year, the odds very much favor long term success…but again, those are just hypothetical odds…not a guarantee.
First up, here are the historical numbers…which are specifically aimed at what Cotton does from right now, the last two days of March until expiration of the July Cotton contract on July 9th.
The whole purpose of the following table is to show you how much July Cotton has historically moved, in either direction, away from where it is right now during the next 102 days…Although Cotton has frequently moved significantly in both directions, I have here only recorded what the BIGGEST move was, whether it was up OR down…as the size of this move is specifically what interests me with regard to the strategy recommended below. I am not trying to make money in both directions…All I want is to see Cotton go one way or the other.
July Cotton – Price Movement Between March 31 & Expiration
Bottom line summary…There is one +1.98 cent year (crazy small), with the next smallest being -6.02, and then a +7.16…Everything else is bigger, many being much bigger…and the point is, with the option position outlined below, anything over a 5 cent move, in either direction, will make this trade profitable…And beyond that, a move of 7-8 cents, again, in EITHER direction, should produce about a 100% return. To be absolutely clear though, if Cotton does go dead sideways, you could also lose 100% of what you have invested.
So here is the recommendation…See for yourself…Decide for yourself is this makes sense…Decide for yourself if this is just pie or the sky…or if the numbers actually DO present very real odds of success.
A few extra notes…
The fact that Cotton has been trading “quietly sideways” since last September has contributed to options prices being quite cheap…meaning more potential leverage.
All of the numbers showing “options worth” above are estimated on the conservative side, pretty much just counting intrinsic value and not taking into account how volatility can change those numbers to the upside…or how much time value they also may have.
There are various ways to handle the position if/when it does make the expected move…Having multiple positions, for example, and taking part of them off at a predetermined profit point, then allowing the balance of the position to potentially trade further…The truth is, there are lots of ways to handle it, but the first step is simply to put it all on correctly.
Here’s a long term chart…to note that there ARE some very big moves in Cotton.
Some of you will remember the old “2 & 1” New Year’s Eve Gold trade we used to make…until Gold got TOO volatile and expensive option prices no longer made the idea mathematically feasible…Well, this is the same sort of thing...with the big difference being it has a heck of lot more time to work.
Some of you also know that, in spite of my often strongly held opinions, I consider “What I think” to be a minor part of the trading equation…that what matters far more is the math…or more specifically, how movements in the highly leveraged option markets can result in major percentage changes in the value of any option…especially if you do utilize some version of the Own Both Sides strategy…AND I KNOW THAT THESE NUMBERS, AND THE POTENTIAL THEY SUGGEST, ARE VERY REAL.
And if you are interested, do be aware that there is a major crop report out Tuesday at noon…and it could produce some of the volatility I am looking for…in either direction…And while anything is possible, it would probably be best to be in ahead of the report, with option values currently cheap (to me), versus afterward, when they may become inflated (exactly what I want) due to big market movement.
Give me a call if you are interested…or if just to talk. I am always interested in hearing what is going on in your real world lives.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Cotton