Option prices are largely determined by volatility, which means quiet periods in markets tend to drive the cost of options down. In rare instances, options get cheap enough to justify buying both puts and calls at the same time. This sets the buyer up to capitalize on a breakout move in either direction. We believe sugar is providing one of these opportunities for the second time this year.
Sugar is typically a very volatile market. It has moved up or down 26% or more eight times since 2014. Five of these moves occurred over a time span of 3 ½ months or less. The sweet stuff has been abnormally quiet for over a year. This has caused the volatility premiums of both puts and calls to fall substantially, lulling traders to sleep. It provides us with another “both sides from the middle” trading opportunity.
Data Source: Reuters/DataStream
Bollinger Bands measure market volatility by tracing out a trading band 2 standard deviations above and below a given market. Wide bands indicate high volatility. Narrow bands illustrate low volatility. Daily Bollinger Bands in sugar are the narrowest we’ve seen them all year. (See chart below.)
March sugar options are currently pricing in volatility no higher than 8% over the next 3 months, making the purchase of both puts and calls reasonably inexpensive – especially given sugar’s price history. Will the next move in sugar be a rush or a crash? We don’t know. Sugar put and call options are cheap enough to cover both possibilities for a reasonable cost and risk.
March 2020 13-cent sugar calls cost $347.20 as of yesterday’s close. March 2020 12-cent puts cost $291.20. RMB group trading customers may want to consider buying both simultaneously for a net cost of $650.60 or less. This plus transaction cost is your total risk on this position.
Our upside target of 14.50 cents per pound is just above old swing highs. Our downside target of $10.50 cent per pound is just below old swing lows. The “strangle” suggested above will be worth at least $1,680 should sugar hit either one of these targets prior to option expiration on February 18, 2020. An upside breakout could travel much further due to sugar’s proximity to its ten-year lows.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1991 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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