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Coffee Futures Options Trade Entry 7: Humble Hobo

October 14th, 2008 · No Comments

I’m presently down 50K of the initial 60 speculated. The situation looks dire for me and exceedingly bullish for coffee. This is one of those situations when a person can be right on a market and still loose big. I had the opportunity three weeks after buying to sell my December contracts at a profit and roll them to a later month. I did not take it and now they’re down 90% of the purchase price. The contracts I purchased as a long shot, the May 170 call options have turned out to be the saving grace of the account, though still down 75 percent at present. The December contracts are set to expire in thirty days, and I have to make that impossible call whether to sell December for a mere 5K and buy one single may contract, or wait and see if this market will bail me out in the next few days.

Reasons for Skepticism
Let me start by saying that this decline, while damaging to the short and intermediate term technical picture, is a very bullish long term development, expounded in the section below. My skepticism is time based only, as my call option contracts are set to expire November 11th. A recovery in prices of 15 to 25 cents in thirty days is possible, but not likely given the current financial crisis. Coffee has been beaten down terribly with the rest of the commodities complex and may continue to trade on fear rather than on fundamentals over the intermediate term. While I don’t believe this will continue to be the case, I can’t rule it out. Furthermore, at present there is no real lack of supply.

Reasons for Hope
1. Coffee is currently 20 cents below the cost of production.
2. Coffee has fallen to and held at $1.15, which happens to be a perfect retracement to the long term trend line, connecting lows each year from 2005 to present.
3. Seasonality is exceedingly bullish October through December, and remains strong through May.
4. Commercials have finally finally finally gone long this market. The last indicator I was unwilling to wait for two months ago before buying in. Commercial traders have picked and/or caused every long term bottom in coffee over the last 5 years, and each of those lows was followed by a strong rally taking prices 30 to 70 cents higher depending on the year.
5. Friday, October 10th 08, all commodities fell sharply, the dollar rallied sharply, and coffee miraculously closed up on the day after opening 4 cents down. It showed remarkable strength amidst complete chaos and deterioration all around it.
6. Depressed prices translates to decreased investment translates to cutbacks in crop care, hired help, and eventually production.
7. I expect coffee to show surprising resilience to the looming recession. Where copper and cotton may have a sharp contraction in demand; coffee may experience an increase for three reasons:
          1. Coffee drinkers will shift from more expensive coffee house specialty drinks to basic black they can brew at home for a tenth of the price. In so doing more coffee will be washed down the sink than occurs using the more efficient methods of coffee houses.
          2. Coffee is less a discretionary expense than a staple, and its use benefits from stress and hard work, both of which are occurring in copious amounts at present, induced by fear of financial ruin or lack of security. Coffee drinkers are like smokers and alcoholics, relying on caffeine in good times and bad to make it through the day.
          3. It’s very cheap.

Just so people don’t take me for a reckless carefree hobo; I am experiencing a great deal of stress and fear at present. This situation is frightening, especially because the money I’ve lost is not mine. I’m having trouble sleeping and concentrating on things other than the losses I’ve incurred. It’s borrowed, and there is no easy way for me to pay it back. I’ve resolved to rework my plan and then to work that plan until the market capitulates to my will and does whatever the hell I wish. To do this I unfortunately need to fight my way out of this hole or go deeper into debt. I need more capital and quick if I’m not only going to take advantage of these prices, but if I have any real hope of digging myself out of debt and maybe making some profit to boot. There’s no room for pride in this game. The second you start to think you know something, the whole financial system collapses and, defying all reason, your diamond in the rough is dragged straight down to hell. But alas I am humble, and I have no problem asking for and with any luck borrowing more green to speculate with.

Tags: Commodities · Current Trades

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