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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...
Bill Rhyne
866-578-1001
770-425-7241
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