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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,200 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old May 9th, 2013, 10:50 AM   #1571 (permalink)
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Quoting 
DJ Arabica-Coffee Futures Jump to Nine-Week High of $1.4570/Lb.

NEW YORK--Arabica-coffee futures advanced Thursday to a level last seen in
early March as investors closing out bets that prices would fall triggered
automatic buying around $1.4450 a pound.

"The funds are liquidating some short positions," said Andre Santos, a
traders at Ally Brazilian Coffee Merchants in Plantation, Fla. That
short-covering boosted the market to a level where investors had pre-placed
orders to buy, which sent futures cascading upward, he said.

Arabica coffee for July delivery on the ICE Futures U.S. exchange was
recently 0.7% higher at $1.4525 a pound, down from an intraday high of $1.4570
a pound.

With the market moving higher for a sixth straight session, it isn't
surprising to see funds closing out short positions and adding longs, Mr.
Santos said. But there are "a lot of negotiations being made in Brazil when the
market goes up like this--producers are willing to sell," and that could cap
the upside to the rally, he said.

Prices have been under pressure as No. 1 coffee producer Brazil begins what
is expected to be the biggest "off-year" harvest ever in the country's two-year
crop cycle.

Short covering taking KC futures higher.

But you also have this.

Quoting 
Brazil's exports of unroasted green coffee were up 37 percent in April compared to the same month a year ago, totaling 2.4 million 60-kg bags, the Council of Green Coffee Exporters, Cecafe, said on Wednesday.

So this rally will be limited.

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Old May 9th, 2013, 01:31 PM   #1572 (permalink)
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ron99 View Post
OK I think I am over he shock of how close to ITM you sell options.

@ron99

We bought back our 86 crude puts yesterday (as part of a 97/86 strangle using July options) and took today's pullback in crude as an opportunity to offset the calls and roll into a balanced strangle with better positioned strikes. We recommended that for every 97 short call coming into the day, traders buy it back and sell 2 101 calls and 2 89.50 puts. This created a credit of about 80 cents per roll out. Hopefully, I can get back to sleeping at night

In case you are wondering why we didn't opt for strikes further out for an even money roll, we feel like crude options tend to stop eroding once they reach about 30 cents in value....at least until you get close to expiration. We are trying to avoid being handcuffed into the trade until expiration.

*Sorry for the ramble, it has been a crazy day.

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Old May 9th, 2013, 01:34 PM   #1573 (permalink)
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ron99 View Post
Short covering taking KC futures higher.

But you also have this.
So this rally will be limited.

We rarely recommend buying options, but we did in coffee back in April (the July 155s for about 1.20). Luckily they finally paid off today (they are trading near 3.00). As you know, long options don't always work out that well, lol. We recommended to lock in the profit today, you could be right about this rally.

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Old May 9th, 2013, 03:18 PM   #1574 (permalink)
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ron99 View Post
Short covering taking KC futures higher.

But you also have this.
So this rally will be limited.

From a technical perspective I'm anticipating that the 1.5 area will provide short-term resistance. The major resistance area to be watching is the 1.57 to 1.6 area that is major weekly resistance.

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Old May 9th, 2013, 03:57 PM   #1575 (permalink)
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Futures Edge on FIO
Here's my take on Coffee.

The specs have been short KC futures for months. Short 26k on 3/19. But not enough of them took profit the next 6 weeks while KC stayed in a tight $10 range. As of 4/30 they were still 19k net short.

Now we get into the cold times, possible frost, right before harvest. Last night it was 37 degrees in the southern most coffee grove region (but most of the groves are further north now). The lows are seen rising into the 50s the next 10 days.
Monthly Weather Forecast for Ponta Grossa, Brazil - weather.com
Here are the coffee growing regions.
http://www.brasilbar.com/blog/wp-content/uploads/2010/11/coffeeregion.gif
Ponta Grossa is southwest of Sao Paulo on the map in Parana.

So now the specs are scared of giving back their profit so they are running for the exits. OI for all KC futures are down 6.4k the last 5 days when futures increased 9.45 (not including today). Problem is that there is a very good harvest coming in. The weather is dry and good for harvest. World supplies are strong. Demand is barely higher. This will put a lid on KC. Probably 150 max.

So in hindsight we sold early. But the last 3 years KC has been down in May. The specs were 13k net short last year and prices dropped in May.


Last edited by ron99; May 9th, 2013 at 04:05 PM.
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Old May 9th, 2013, 04:36 PM   #1576 (permalink)
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Also this from ICE's monthly Softs Newsletter.

Quoting 
There certainly is no expectation of the government taking austere measures and reducing funding to the sector because of the drop in world prices especially since it was the encouragement by last year’s policies to curb selling of the crop that has in essence backfired and left farmers in a quandary of how to manage two crops at once, especially with reports of warehouse space to store all this coffee is running sparse already and certainly will get worse once the Arabica harvest is underway.

The jump in prices certainly should encourage some producer sales and help to cap the move. Prior attempted run-ups in coffee failed and it would not be surprising to see the same here, especially since Brazilian prior attempts to prop up the market by refraining from selling have been unsuccessful. The market will need to wait for another time because the policy meeting that goosed up the market today was also canceled.

May is finally here and it is typically a month that sees higher coffee prices as pre-winter buying emerges in the event of a frost in Brazil. The likelihood of a cold snap is slim but the seasonal lure is always there and that could also short term help to fuel a pop in the market. Given how far the market has fallen and that prices are digging into levels that in the past have represented fair value, buyers would seem to be attracted to the market like moths to a candle. Once the crop starts to come in and absent any weather scares, July into August typically see new lows. There are very few times when the seasonal pattern is not held to and during these rare times there was always strong justification for the market to buck the downtrend.


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Old May 10th, 2013, 10:48 AM   #1577 (permalink)
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Coffee news

Quoting 
Temperatures were expected to drop in Brazil's coffee belt this week,
encouraging traders to cover bets that prices would fall this week, but
temperatures didn't reach low enough to cause damage, farmers and traders said.

The recent rally is encouraging Brazilian farmers to sell their crop, which
could help pressure prices, said Thiago Cazarini at Varginha, Brazil-based
brokerage Cazarini Trading Corp.

"I don't think [the rally] is going to last," he said. "Producers sold a lot
of coffee [this week]."


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Old May 10th, 2013, 12:50 PM   #1578 (permalink)
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Was able to cover my July NG at 0.001 this morning. Trade was as follows:

4/5/13 sold NGM35C for 0.005.
4/12/13 bought back NGM35C for 0.013. -$90 per contract. At this point I am 2/3 of my way through remaining buffer and from a technical standpoint I don't see things turning around soon enough to ride it out.
4/12/13 Sold 4X this amount in NGN36C for 0.006. $220 net gain per contract if held to expiry.
4/15/13 Worst drawdown point when NGN36C traded as high as 0.013. Remaining buffer was still 3/4 full.
4/16/13 Covered 1/4 at 0.004 -$40
4/25/13 Covered 1/4 at 0.003 -$30
5/10/13 Covered 1/2 at 0.001 -$20

So total from this rollover trade was a net of $40 After the 15th my buffer was $2162 so an ROI of about 1.8%. Not exactly anything to brag about but I think I managed the trade o.k. The other alternative was to take the full hit on the NGM35C since this trade would have exceeded the buffer margin. I would have obviously made more money holding the full amount on the NGM36C until today; however, laying off risk was important.

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Old May 13th, 2013, 01:04 PM   #1579 (permalink)
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@ron99,

With the sell in May premise called into question on the indicies at the moment, how do you see this affecting the energy market?

I'm specifically looking at selling July CL 120 calls. Just not sure what is going on in this complex.

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Old May 13th, 2013, 01:18 PM   #1580 (permalink)
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The fundamentals for oil are bearish. Super high US inventories. Rising US production. Decreasing US demand. OPEC exporting more oil. Slow growth in demand worldwide. I have been selling calls.

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