Toppy Tuesday (as usual) – Why Did China Go Home?


Trade on!

That's right, now Donald Trump claims he was "surprised" when Treasury Secretary Steve Mnuchin asked China's trade delegation to cancel a scheduled US Farm Tour.  That was the cause of Friday's sell-off as the Chinese delegation packed up their toys and went home early and was taken as a sing that negotiations had broken down but now the Administration says that's not the case and that the Chinese were rushed home so they could buy our agricultural products rather than visiting the farms first.

Despite all the BS, we couldn't be more thrilled as we called Soybeans (/ZSU19) Sept Futures a long way back in our May 10th Morning Report at $825 (published at Seeking Alpha) and those contracts popped to 888.50 and October Soybean contracts are now $895.50.  Soybean contracts pay $1,120 per $1 move so $63.50 for our September longs is a lovely $71,210 gain per contractyou're welcome!  

For the Futures Impaired, we also had the following trade idea on the Soybean ETF (SOYB) that runs into November:

As to SOYB, it hasn't been this low since, well, ever – as the contract began in 2012 at $25 and never really went below $17.50 until the trade war began so $14.50 is quite a bargain and, as much as I hate to bet on Trump doing anything right, it's POSSIBLE we get a trade deal and that will hurt our hedges in the Short-Term Portfolio so, in order to hedge the hedges, a bullish bet on SOYB makes sense.  For the STP, we can:

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Buy 50 Nov $14 calls for $1.10 ($5,500)
Sell 50 Nov $15 puts for 0.95 ($4,750) That's net $750 and, if SOYB goes back to $16 on a trade deal, those options will be worth $1.50 each for $7,500 on 50 100-unit contracts, which would be a 900% gain of $6,750 – not bad for an offset and our worst case is owning SOYB at 7-year lows and we can then sell calls to reduce our net $15.15 entry.

As you can see from the chart, the trade is right on the button so you're very likely to collect the full $7,500 in November (if you didn't already cash out, like we did) but, even now, the $14s are $1.40 and the $15s are 0.65 for net 0.75 ($3,750) and that'salready up $3,000 (400%) and, even now, it's not bad as a new trade with an additional $3,250 (86%) upside potential from here.

All this exciting bean trade has gotten the S&P all excited again and we're back over 3,000 – again – and we'll see if it sticks – again – but so far – it hasn't, though there is apparently no limit to how many times we can boost the S&P by saying the China deal is back on:

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Since the Soybean trade went so well, let's take a look at Orange Juice, which is priced down at $99.60, the lowest it's been in 10 years – and that was when everything crashed, so I'm not even going to count that and that puts us back 20 years to get this price.  Though the Florida orange crop has bounced back from insects and hurricanes to 2016 levels, we didn't fail $100 in 2015 or 2016 and I like the fact that /OGU20 (Sept 2020) is down at $114 and /OG contracts pay $1,500 per $1 move so a $20 move higher would make us $30,000  vs let's say a stop out below $110 for a $6,000 loss.  The Sept contracts take us through the next harvest as well.

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There's no ETF for Orange Juice but there is for Coffee (/KC) and we always love it below $100 and /KCH20 (March) is down to $102 and that makes for a fun play but you have to be willing to Double Down at $98 to average 2x at $100 with a stop at $95, which would be a loss of $375 per $1 or $1,875 per contract.  So the risk is $3,750 but the reward, even at just $122 would be $7,500 on a single contract and /KC has been very good to us for two years now.  

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Coffee does have an ETF (JO) and, like SOYB above, we can pick up a spread that can give us a nice return.  We think $100 (though it can dip below) is a good floor for Coffee as it's a point below which the farmers simply can't make money selling it.  For the ETF, which is at $32.50, we can do the following spread:

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  • Sell 5 JO March $30 puts for $1.40 ($800) 
  • Buy 10 JO March $30 calls for $4.40 ($4,400)
  • Sell 10 JO March $32 calls for $3.20 ($3,200) 

That's net $400 on the $2,000 spread so $1,600 (400%) upside potential if JO holds $32 into March.  As long as /KC stays above $98, you should get paid in full.  The downside to this trade is that, below $30, you would be forced to buy 500 shares of JO at $30 ($15,000) but we like that price and you can turn right around and sell calls against it to lower the basis further.

There's always something fun to trade in the markets – even when you are on the sidelines!