Hobofinance

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Coffee Futures Options Trade Entry 11: Still Holding On

December 15th, 2008 · No Comments

Loyal Friends and Readers,

If you’re still with me you deserve some thanks.  This can probably be summed up with a simple ‘Thanks Mom’.  Despite the fact that your candid blogger is down he is still holding on with hope.  I haven’t posted in about a month now, and for good reason.  Absolutely nothing of import has happened.  Coffee has been up and down and relatively flat since then, with the exception of a potentially pernicious breakout, or should I say breakdown, of previous support.  Coffee fell to the 102/103 are for all of a day and recovered quickly.  A quick reminder to all of us bulls that the bear isn’t dead yet, and until he is, respect those traders who rightly sell all rallies in such a market.

That said, this last week the news has started to turn.  For us fundamental observers, the tight conditions we’ve been anticipating are surfacing in Columbia, manifesting as cash prices exceeding futures prices by a good 20 cents.  This is a significant differential that shouldn’t take long to impact the futures trade.  On top of this, the USDA has revised their figures for Vietnam down sharply, by approximately 3 million bags.  And though the long term balance sheet is skewed in favor of the bulls, prices have been able to deteriorate due to ample short term supply.  This alteration in figures and the Columbia situation should finally call that short term perspective into public question.  There is not enough coffee in the world!

Since I last wrote I learned a valuable lesson on call ratio back spreads.  Try not to do them!  I quickly ran into a margin call that forced the trade desk to liquidate a third of my position.  In reality my position was well balance, having a 3 to 1 ratio of long calls to short, with only a 20 cent spread.  There was no immediate threat of an account deficit.  But on paper they were overly concerned with the short position and acted on it before I could.  Thus, my current position, after some adroit maneuvering is as follows:

Long 5 May $1.40 call options

Long 1 May $1.70 call option

Short 1 May $1.20 call options

Total Equity: Less than 5K. 

Admittedly a meager position given my bold start in this market a few months back, but it has some potential of vindicating my honor.  Wave the flag and drink your morning cup of joe.

Tags: Commodities · Current Trades

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