My Future in Futures. Last year around January, I invested $600 and change in a July soybean oil call option. As the experts had predicted, the price of soybean oil went up on the Chicago Board of Trade exchange, and I reaped a double profit, one for the option I bought that became "in the money," and one for the option at a higher strike price that I sold to some hapless fool, which expired "out of the money," which in trader-ese means worthless. My $600 investment grew to over $2,000 in just a couple of months' time. Then I was left with a quandry, what to trade next, so I can do that again? My broker, Larry Griggs of Basic Commodities, which is affiliated in some way with ADMIS in Chicago, was a wise and patient man, and tried very hard to keep me from destroying this little windfall. Unfortunately for me, I was neither wise nor patient, and had wax in my ears. With only $328 left in my commodities margin account, and duly chastened, I let trading alone until I had enough money to risk some of it, and in the mean time studied up on my new passion, commodities.
So with a few hundred dollars to spare, I've bought a put option on July OJ at a strike price of 120, which cost me $375 plus commission. Had I waited a week or two, I could have gotten the 125 strike price at the same cost, but by then my wife would have demanded the money for groceries. You see, July OJ is still going up, but it's meeting resistance. Every day, I watch it trade lower than the day before, only to rally at the last minute and trade slightly higher. I've bet on its price heading unequivocally downward soon, and since I bet against the odds, I didn't have to pay much for it.
So why do I think orange juice is headed back down? What about the crop damage in Florida after two years of hurricanes? What about the leaf canker assaulting the trees? For one thing, Florida orange juice is being badly undersold by Brazilian orange juice, which is picked, processed and shipped more cheaply and in greater abundance. Florida controls only 34% of the world OJ market, while Brazil controls 53%. We have protective tariffs against Brazilian orange juice reaching our shores, but Europe, Canada and Japan do not, so what Florida orange juice there is after the hurricanes and the canker cannot compete abroad. As a result, the amount of orange juice currently in cold storage in the United States has risen slightly from December 31 to January 31, and is likely to go up even higher as the Florida March harvest gets underway, unmarred by winter frost.
As a result, FOJC (Frozen Orange Juice Concentrate futures) has inverted months. That means that the May futures contract is trading for more than the July futures contract, which is trading for more than the September futures contract, which trades for more than the November futures contract. Normally, the later contracts are trading higher, because the cost of storing a commodity goes up with the passage of time. The last time FOJC had inverted contracts was in mid-December, and it headed down then, too. Sugar is presently in a downtrend, and it has inverted months.
In addition, if you look at an orange juice chart (a good website for commodity charts is http://www.tfc-charts.com/, and if you want to see the July OJ chart, you can either click through the menus until you find it, or try http://www.tfc-charts.com/chart/OJ/76), you will notice that the price of orange juice, while it was trending upward, regularly went into brief periods of resistance, when the price refused to go any higher and sank a little, followed by a period of support, when the price refused to sink any further. So long as the upward trend was nice and agressive, you could draw a line on the chart between the bottom of the support periods, and that line would either go straight up at the same angle, or go straight up at a steeper angle, which means that the trend is strengthening. This is known as the ascending line of support. When the line goes up at a more gradual angle, that means that the trend is weakening. The present period of support has crossed the ascending line and is still going flat, which means that the trend has either weakened or is about to reverse.
I'm betting that the trend will reverse at least temporarily, both because of the inverted months, and because Brazilian orange juice is undercutting Florida orange juice on the global market, and because the Florida crop has suffered no frost damage. If I win my bet, I'll be able to face Larry Griggs and plunk down a thousand dollars or more for further trading, only this time, if not yet patient at least wiser, I'll listen to him.
So with a few hundred dollars to spare, I've bought a put option on July OJ at a strike price of 120, which cost me $375 plus commission. Had I waited a week or two, I could have gotten the 125 strike price at the same cost, but by then my wife would have demanded the money for groceries. You see, July OJ is still going up, but it's meeting resistance. Every day, I watch it trade lower than the day before, only to rally at the last minute and trade slightly higher. I've bet on its price heading unequivocally downward soon, and since I bet against the odds, I didn't have to pay much for it.
So why do I think orange juice is headed back down? What about the crop damage in Florida after two years of hurricanes? What about the leaf canker assaulting the trees? For one thing, Florida orange juice is being badly undersold by Brazilian orange juice, which is picked, processed and shipped more cheaply and in greater abundance. Florida controls only 34% of the world OJ market, while Brazil controls 53%. We have protective tariffs against Brazilian orange juice reaching our shores, but Europe, Canada and Japan do not, so what Florida orange juice there is after the hurricanes and the canker cannot compete abroad. As a result, the amount of orange juice currently in cold storage in the United States has risen slightly from December 31 to January 31, and is likely to go up even higher as the Florida March harvest gets underway, unmarred by winter frost.
As a result, FOJC (Frozen Orange Juice Concentrate futures) has inverted months. That means that the May futures contract is trading for more than the July futures contract, which is trading for more than the September futures contract, which trades for more than the November futures contract. Normally, the later contracts are trading higher, because the cost of storing a commodity goes up with the passage of time. The last time FOJC had inverted contracts was in mid-December, and it headed down then, too. Sugar is presently in a downtrend, and it has inverted months.
In addition, if you look at an orange juice chart (a good website for commodity charts is http://www.tfc-charts.com/, and if you want to see the July OJ chart, you can either click through the menus until you find it, or try http://www.tfc-charts.com/chart/OJ/76), you will notice that the price of orange juice, while it was trending upward, regularly went into brief periods of resistance, when the price refused to go any higher and sank a little, followed by a period of support, when the price refused to sink any further. So long as the upward trend was nice and agressive, you could draw a line on the chart between the bottom of the support periods, and that line would either go straight up at the same angle, or go straight up at a steeper angle, which means that the trend is strengthening. This is known as the ascending line of support. When the line goes up at a more gradual angle, that means that the trend is weakening. The present period of support has crossed the ascending line and is still going flat, which means that the trend has either weakened or is about to reverse.
I'm betting that the trend will reverse at least temporarily, both because of the inverted months, and because Brazilian orange juice is undercutting Florida orange juice on the global market, and because the Florida crop has suffered no frost damage. If I win my bet, I'll be able to face Larry Griggs and plunk down a thousand dollars or more for further trading, only this time, if not yet patient at least wiser, I'll listen to him.
posted by Ben Maxwell | 11:48 AM
3 Comments:
Yesterday, I nearly lost it. Both March and May OJ hit record highs, and July OJ was three ticks short of doing so itself, but then in the last hour or so of trading, prices collapsed, and continue to decline today. Here's hoping that next week sees my option cross over into "in the money" status, and all your orange juice is cheaper. But yesterday I also learned something that no daily candle chart could teach me. Because I looked at a (delayed) minute-by-minute candle chart with a volume overlay (as well as accelerated moving average and bollinger bands), I could see the anatomy of a rumor. Prices soared on the rumor, and there was an initial frenzy of buying, followed by panicked selling when the rumor proved to be a crock. The only thing better would be to visit the pit itself and take part in the hue and cry of the daily trading.
Friday, the same thing happened in reverse. Prices dived for the canvas, only to reverse and climb higher in the last hour or so. Now I know how the bulls from Thursday felt. But imagine my elation when the price failed to approach the highs of last Thursday, and closed at 132.45. It's down again today.
Looks like I was premature from the getgo. July OJ has just hit an all-time high of 135.5, and I could have bought a put option with a 125 strike price for less than I bought my 120 put. But I've already got the bear by the tail. Best ride it out and hope to tame him.
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