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Coffee Futures Options Trade Entry 6: Crapping my Pants

September 17th, 2008 · No Comments

Commentary for 9/16/08

I crapped my pants today. I’ve always known coffee is a diuretic, but what I seem to need a constant reminder of is the rare ability of coffee futures to elicit the same internal response. The market not only fell through long term support around 135, it dropped 6 cents on the day and closed at the low. One has to wonder why. One has to wonder why they were so stupid as to borrow 60 K and go all in when the entire commodities complex is going to shit, neigh, the entire financial institution is going to shit. As of today I’m down 50 %, quite a swing. After two weeks I was up 20K and now currently down 30K. So I’m left with the same two options I had before I lost 30 grand; do I stay in or get out?


Problem 1: Strong buy signals were given from both the MACD Histogram and the Relative Strength index on September 19th, marking the base for a nice little rally. These two indicators have been on the ball at the beginning of every major trend change in coffee for the last four years. Today however prices fell through previous lows and proved both of those buy signals incorrect. When such an event happens one needs to throw out all indicators because, well, they’re not working. This leaves a trader a tad naked, with only his discretion to guide him. This is basically the same as being naked because a trader’s discretion is as whimsical as a child’s love of a new toy.

Problem 2: There is no support for this market for a ways down, leaving me with the very real risk of watching this 50% loss becoming a 90% loss very quickly (which may only be another 5 to 10 cent decline if I had to estimate). This is when the vice of options trading, no liquidity, really hurts. If I wanted an out today in order to let this market get flushed out with all the rest, I’d have to give my options away for someone to be willing to take them off my hands.

Problem 3: Gold, Silver, and Crude have also given failed signals, and the markets spiraled further south.

Problem 4: I feel sick to my stomach and the panic that comes with riding a loss. And I crapped my pants.

Possible Explanations for today’s price move:

1. This plummet today is an example of throwing the baby out with the bath water. Coffee still has strong fundamentals, and even though damage can be done to prices temporarily people need caffeine and aren’t going to stop drinking just because a few assholes on Wall Street were successful at robbing millions of assholes on main street. This is the washout coffee needs to dump the last of the overleveraged hedge funds and welcome the last bit of commercial hedging before this market bottoms long term.
2. The rapid strengthening of the dollar has thrown off valuations of commodities to where comparing these prices with those 5 months ago are meaningless. The dollar has strengthened against the Brazilian Real, making current prices much less appealing to farmers, somewhere to the tune of 8 to 15% less appealing in real terms. Producers are capitalizing on higher exchange rates and selling this bottom regardless of what appears to be relatively cheap prices on the daily charts.
3. Manipulators are having a ball and taking out stops below the 135 level in order to make a quick buck. (Could be the case, but when prices close at the bottom of this 6 cent range I have to wonder where the buyers are. Not to mention days like this tend to precede larger declines. Coffee eats like a bird and shits like an elephant they say.)

1. Why is coffee falling out of bed in late September when it refused to break support throughout the Brazilian harvest in May through August? I don’t believe that the harvest is flooding the market, even if exports from Brazil picked up pace. This is actually a normal seasonal pullback before prices commit to an uptrend, but it is rare for the September pullback to break support set in August or July.
2. Why have commercials not gone heavily long as of yet (as of today they may have, we won’t know until open interest and the Commitments of Traders report are released Friday). Commercial traders have been net long at the bottom of every seasonal change in trend for the last 5 years.
3. How do I protect myself at this point?

I still believe this market has reason to rise (I knew I was early to enter the market when I did). Therefore a fire sale won’t do here, not to mention no one is going to take my call options off my hands if the market continues to tank. So at the very least I’ll wait for a rally, large or small to liquidate my December contracts. Even if this market falls ten cents tomorrow, and it could, wiping out the rest of my equity in the process, I refuse to sell cheap and buy dear. It takes a lot of discipline not to be overrun with panic and sell sell sell, and that is indeed all I want to do at present. But so does everyone else, which is why odds are I’m better off being a buyer or waiting.

I have two months left on my December contracts, and those are the options which pose the largest threat. This little breakdown could weaken the market to where two months may not be enough time for buyers to regain their courage and pull prices back up to par. I need to be out at least another three to six months out at this point and will look to roll those Decembers further forward as soon as possible. Despite this stressful situation, I still have faith in power of market fundamentals to win out in the end, regardless of short term erratic behavior. And as we all know, low prices stimulate demand. Bring in the buyers!!!

Tags: Commodities · Current Trades

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