Cotton Futures and Options
COTTON futures and options trade on the NYBOT. (The New York Board of Trade) Cotton has low to medium volume and liquidity; just enough to get by. An account margin of $1300 controls 50,000 pounds of cotton, worth about $30,000. One full point of price movement equates to $500.
Day trading cotton futures can be difficult. At times, the short-term charts can make little sense. Cotton futures fills (order execution price) often have significant slippage while the option fills are slow coming back from the floor. Market orders will get you filled immediately but you may not be happy with the results. Obviously, the main problem with short-term trading cotton is liquidity.
Liquidity is not really a problem with long-term cotton position trades lasting weeks in duration. Low liquidity will make little difference in your overall results because of infrequent entries and exits. Effectively using limit orders in cotton will solve the slippage problem, but makes entry and exits more challenging.
Normal moves of five to ten cents are common in cotton. ($2500-$5000) Over the last few decades, the cotton market has cycled within a large price range. The extreme lows are 28 cents to highs of $1.17 a pound. The goal of many long term traders is to catch big moves like this.
Weather is always a consideration when trading cotton. Droughts, floods, disease and insect infestation (boll weevils, etc) can propel prices. There’s times when cotton trades counter to the other grains. (wheat, soybeans, corn, etc) What may be good growing conditions for cotton may be adverse to the other grains and visa versa.
LUMBER Futures and options are traded on the (CME) Chicago Mercantile Exchange. An account margin of $1700 controls 110,000 board feet of lumber worth about $27,000. One full point in lumber equates to $110.
Lumber’s forty year low in the 1970’s was $94. It’s all-time high was $493.50 after the Mt. St. Helens volcanic eruption blew out vast amounts of timberland. A $100 move in lumber over several months is typical. ($11,000 a contract) Limit moves up and down are a very common occurrence. The liquidity in lumber futures is a problem but tolerable. Market orders are sometimes necessary, but there is a big chance of slippage.
Lumber options are illiquid. They are hard to buy and sell. A series of limit moves in your direction will help you liquidate with a nice execution price and profit. Effectively using limit orders in lumber will solve the slippage problem, but makes entry and exits more challenging
Lumber prices can trend well since supply and demand are based on various long-term trends. These include U.S. housing demand and the supply trade agreements with Canada.
Short term trading is possible if you are nimble. Look for a five-dollar swings as an objective. ($550) If you get a limit move in your direction, you may want to get out of your futures contract. Reversals are common after big moves. However, if the move is supported by long term bottoms and major time cycles, you may want to hold on for what could be a big ride.
Here’s how I look for opportunities in the cotton and lumber markets: First I generate a TimeLine forecast that shows a strong move up or down in cotton or lumber. The TimeLine is based on time cycles and other preprogrammed patterns. I then determine if the move is expected to be choppy, trending, and for how long. This helps us focus on possible directional futures/option positions or writing options in a range, or even writing options with the trend.
Next I use automated option software to search for the best of 1600 strategies based on the expected market move. I compare these option to option combinations against futures to options combinations. At some point I will find a compromise between risk, profit and simplicity in one or two strategies. In hindsight there’s always a best strategy we could have used. Keep this is mind when narrowing down the choices. When finished, we want to have one or two potential trades to work with. We call the selected few, “high probability, low risk trades.”
Remember there is more to planning a trade than just coming up with a forecast. The market may move as predicted but we can still lose by choosing the wrong trading vehicles. Pick the right vehicles and strategies that will allow us to stay in the market without excessive fear, but still carrying calculated risk.
We NEED to take on calculated risk or the market will not pay us for our services. In addition, the vehicle has to move far enough to make a profit without letting the expense of protection eat us up. Excessive protection (risk avoidance) can come in the form of option premiums, too close-in stop loss orders – and overdone, complex spread strategies. Matching a forecast to a strategy is an important skill to succeed in commodity trading.
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
Thomas Cathey – 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his market forecast TimeLine Trading charts and get his complete 44+ lesson, “Thomas Commodity Trading Course – all free.” [http://www.thomascapitalmanagement.com/commodity/welcome.htm] Main site: [http://www.ThomasCapitalManagement.com]