July 11, 2023

Buy Cotton With Both Hands

but do it using the both sides strategy

Irrespective of any opinion about any market, the following excerpt from my website is the essence of how I believe trading futures should be approached…ESPECIALLY in today’s fund flooded world in which extreme volatility and very large moves are generally the norm…It’s a worthwhile read I think…Hope you’ll take a few minutes to go through it…

A Basic Philosophy 
&
The Both Sides Strategy

My bias as a trader is very much (but not exclusively) toward the technical side with my preferred trading vehicle being the purchase of options on futures, with a typical trade having a three to nine month perspective. What follows is a brief description of the Both Sides Strategy I often employ to take positions....All references to gains and losses are made with the understanding I am using long options strategies only.

If you trade futures, whoever you are, much of the time you are going to be on the wrong side of the market. My approach to trading assumes we are definitely going to be wrong some of the time.

Futures are inherently volatile...and my perspective is, what we are really trading is volatility. All the markets will have periods of sideways action, but all of the markets are frequently trying to move up, or down. Your objective is to be going with them when they are really going somewhere.

Futures are highly leveraged. Get on the right side of something which is truly moving and high percentage gains can be a function of that leverage. It goes without saying that same leverage can also lead to high percentage losses.

Buying Futures Options allows you to be on both sides of the market at the same time.  Just what it says. You can buy options in both directions and whichever way the market goes (if it does move), one side will generally benefit from it, one side will not. Of course, if it doesn't move, neither side will benefit, and you will probably lose money.

Select markets which have done nothing for a long time.   If a market has been trading sideways for quite some time, probabilities "should be" (anything is possible in the futures markets) better it is soon going to move somewhere. Long sideways moves are often followed by large directional moves.

Or select markets at price levels at which you can make the statement, " It will not stay here, and, in  fact, should move a long way from here, one way or the other".  As an example, you might look at a market making the same high for the fifth or six time in six months and say, "I don't know which way it's going, but it's not going to be right here six months from now". Obviously, it could be, but, again, probabilities "should" favor it moving away from this old high, and this move could be either substantially up, or down.

When you find something you like, put your money on it, but buy some options going opposite your opinion. This goes against everything you will feel. You think you are right or you wouldn't be making the trade. Most of the time, my recommendations are in units of two calls to every put for bullish opinions, or two puts to every call for bearish opinions.

There are then three major scenarios....

1. The market does move, only it goes the wrong way.   Your objective is then to sell the options you purchased as "insurance", as well as those representing your opinion, (whatever they are worth), when, and if, you are able to put most, or all, of your investment back in your pocket. Our experience is, when most people (ourselves included) are wrong, they are very wrong. Not only does the market not move in the direction they anticipated, many times it goes exactly opposite their opinion in a big way. We find, if we are wrong, using this strategy, even a moderate move the wrong way may get you most, or all, of your money back. Obviously, it must repeatedly be noted that if the market does not move in either direction, you easily might lose 100% of your investment, including all of the costs (commissions & fees) associated with buying or selling the options.

2. If you are truly right in the market, you will lose the money you spent on insurance, but you will probably not miss it. If you are right, as a function of the leverage you work with, you have an excellent chance to make enough on the trade to see the insurance, in my opinion, as only a relatively small cost of doing smart business. (SEE THE MATH ON THE COTTON CHART)

3. If the market you enter continues to go sideways, you stand a good chance of losing on both sides. If you get in something which is statistically "due" (in your opinion) to go somewhere, and it still doesn't move during the time you are positioned, you might lose all of your money you have in the trade. But the same trade will still be there and the probability (again, in your opinion) of an impending move may have gone higher. You can put the trade back on by buying options with more time until expiration. Futures are inherently volatile. Sooner or later, they DO move.

To begin…

Yes. BUY COTTON NOW.

It doesn’t matter how far…or not…the Fed goes.

The USA and World Economies are going nowhere but UP.

I’m not going to write at length my long standing (for 3 decades) belief that the world is still in an explosive expansion generated by the Technology/Computer Revolution and the Global Return to Capitalism that occurred with the collapse of the Iron Curtain and China’s adoption of capitalism, both of which added several billion consumers and business oriented individual to the world economy. As always, I note that there are, for sure, periods in which contractions do occur, but no matter how severe they may be, the planet absorbs the negative impacts…and then continues growing…

Which is why GDP looks like this…ALWAYS  pushing higher…

And the Dow, for the past century, looks like this…

And so…Buy Cotton?

After an enormous bull run ended at $1.55 a pound in May of last year, as can be seen below, Cotton has been more or less tracking the Stock Market…and most notably, has been trading in a 7-8 cent range for about 8 months now…which IS the perfect definition of what I have referenced in my trading philosophy, “Select markets which have done nothing for a long time.” And beyond that, with my bullish view of Stocks and the Economy, with Cotton being something of a proxy for both of them…AND…with the scorching weather taking place in parts of the South and Southwest, I THINK COTTON IS A SCREAMING ROARING BUY. It has been “laying here” for all of 2023 and I absolutely believe that is about to change…and IMMEDIATELY so.

As noted for years, this is a market that repeatedly moves in 30-50 cent swings, quite often virtually straight up or down…

I maintain that sideways is NOT what we’ll see here between now and December…So buy it now BEFORE it’s suddenly 6-8 cents higher.

The smartest way to do this…?

As I know some of you will ask about this…You can just buy calls…

Today’s close, up 2.87 cents ($1435 per futures contract), was the highest in 6 weeks. I don’t know if weather is about to finally find its way into Cotton market prices, but every time I see one of those Southwestern USA scalding hot weather stories on the nightly news…and I know that seven states (Texas, Arkansas, Missouri, Oklahoma, Mississippi, Alabama & Georgia) produce about 75% of all US Cotton? All I can think is, “What day does the lift off begin?”

And so maybe that was it today. Sometimes the markets just lay there and lay there and lay there…And then some mysterious trigger goes off…and it’s off to the races…For my money, I don’t just wonder, “Is this it?” I am just getting on it…

Get in touch if you have any interest in this…

Thanks,

Bill

 770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Cotton