It’s been a long wait. RMB BMTA Alerts originally suggested buying March 2017 75-cent cotton calls back in July of 2015 as part of a multi-strategy play on the then-developing El Niño. While we didn’t get the pop we wanted from that weather phenomenon, the white, fluffy stuff didn’t falter much either giving us no real signal to exit our bullish position. We were fortunate enough to have purchased our calls during a period of extremely low volatility. This allowed us to hold them long after the El Niño we had counted on for big price gains had faded. This is the beauty of using options to make “big move” market plays; fixed risk means staying power.
Our patience may be finally paying off. March cotton is currently undergoing a short covering rally. Like most such rallies, it has the potential to rocket big to the upside or to reverse in a hurry. The next few days will be critical. A close over old swing highs at .7780 (marked as “key level” on the chart below) could launch prices to 80 cents or beyond in relatively short order. On the other hand, failure to breech this level quickly could lead to major disappointment.
Data Source: Reuters/DataStream
Our March calls expire next Friday, which is eight days from now. This is definitely not enough time to achieve our original price target of $1.00 per pound. A cotton price of 75 cents or less on February 10 would also mean our 75-cent call options that closed yesterday for $1,015 would expire with no value. Do we dare look this gift horse in the mouth?
The safest play would be to exit immediately and recoup most if not all of the original cost of your options. It all depends on Thursday’s open. The aggressive play would be to give the white, fluffy stuff one or two days more to take out old highs at .7780 and sell into any rally that results from short covering above this level.
Time waits for no one. RMB trading customers that own March 75 cotton calls should considering contacting your personal RMB Group broker to see which of these exit plans best suits your needs.
If You Are Not an RMB Group Trading Client…
Please be advised that you need a futures account to trade the recommendations in this report. The RMB Group has been helping their customers trade futures and options since 1984 and are very familiar with the strategies suggested in this report. Call us toll-free at 800-345-7026 or 312-373-4970 direct to learn more. We’ll send you everything you need to get started. You can also visit www.rmbgroup.com to open an account online.
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