This complimentary article from Options Profits was originally published on February 1 at 9:33am EST. Don't risk missing over 40 options trade ideas every week and exclusive commentary from over 10 experts. Click here for more information and a 14-Day Free Trial.
Welcome to the weekly resource brief where we break down opportunities in the dynamic commodities markets. The mandatory use of options allows us to control risk and take advantage of longer term trends in the true Supply and Demand markets.
These futures options have many advantages and offer a more pure play with leverage on leverage benefits not available with typical equity options plays.
In addition to identifying profitable option plays the intention is to educate, inform and even entertain with our discussion about the vital economic building blocks, Commodities, that are the underlying basis for all investments.
Briefing for February 1 - Dollar Grain Gain and Cup Commodity Costs
As we have just concluded January, it is time to evaluate the markets and find some keys for the weeks ahead. Stocks as viewed by the S&P 500 have rallied 5% since the New Year with four weeks of consecutive gains. The yearly highs up above are the next resistance to overcome.
By the way that post financial crisis record 1370 level is only a little more than 3% higher and well within target range. In fact, that broad based stock index that all investments are scored against for performance is closing in on DOUBLING since the March 2009 extreme lows. S&P 1450 is the next breakout objective with the ALL TIME HIGHS from 2007 only another 100 points above that to erase the losses over the last five years.
Don't Call It A Comeback - Leverage On Leverage
What a month it has been with Gold leading the charge higher to print $1750 an ounce today and double digit gains for January. The Resource Alert $1750/$1825 June Gold spread is now At-The-Money, meaning it will gain at a faster rate on upward moves, after cashing in money last week.
Technically the first objective was $1725 where we unloaded half of the positions to pocket a nice round $1000 per play. The actual Gold price jump from $1610 where prices stood when we entered out spread was a modest 6% plus move. The POWER OF OPTIONS paid off with a gain TEN TIMES that amount with completely limited risk to see a 67% profit return in little more than two weeks.
Another bonus is that half of the position remains for more upside gains. The spread maximum is $7500 with expiration May 24th for many more months of bullish trend development.
Dollar Daze Sale
The return to sender selling in the Dollar is a natural realization that "safety" funds can get better returns. The increased risk tolerance with lessening global fright will shift monies to more appealing assets than low yielding Treasuries or the damaged Dollar.
The same emotions that drove investors to safe havens will now be bullish drivers as the fear of missing out can spark a frenzy. A resumption of the 25 year downtrend in the Dollar only accelerates commodity gains.
The currency reversal possibilities should have a very positive impact on Crude Oil, positioned with a bullish July spread position. As mentioned over many of the past weeks, Crude prices maintained gains even as the Dollar marked new yearly highs.
The positive action in other assets as Oil sits essentially unchanged in January bodes well for the high tide floats all boats strategy. A modest run to mirror Gold or Stocks pushes the $105 well cap that has held back this potential gusher.
Home On The Dollar Range
The micro economic analysis sitting on my deck at the end of the first month of the year may not be representative of the country as a whole. Sunny and 55 degrees is not a typical winter day in Chicago, the center of the commodities universe, a stones throw away from the most fertile crop growing region on earth.
It does however illustrate the always dynamic and unique weather impacts that are a challenge every growing season from seed to bushel basket. The two month December-January average temp above 32 degrees, +7 normal, is the 13th warmest in the past 138 years. With only a dozen subfreezing days compared to Chicago's normal winter 42, the snowfall is less than half the average under 14 inches and the 10th least snowy in 127 years.
Grain needs Rain and moisture for that matter to grow. Springtime has not officially sprung and the dreaded "D" word hangs over the agricultural markets from Wheat to Cattle.
Corn is especially interesting after a failure of the USDA to lower 2011 production in the bearish January crop report. Prices crashed below $6.00 on disappointment but rebuilt support. Front month March Corn regained nearly 50 cents in the weeks since the data dump. The concerns of plant development has, farm phrase, an undercurrent of positive price potential.
Pop Corn Channel Trade
An over four-month range since mid September between $5.80 and $6.80 a bushel sets up a breakout. That one-dollar action projects a 15% move to $7.80 on a rally run. Higher lows and many, many bullish weather variables in the months ahead decrease the likelihood of a perfect growing season to replenish supply.
The price shock potential of always being a season away from crisis makes long plays the path of lest resistance. Any reduction in production can have major price power higher. A rally above $8.00 technically sends Corn to DOUBLE DIGITS.
Coffee Cup Crisis
Recent reports say the average American spends $3000 a year on lunch and Coffee. McDonald's (MCD), Starbucks (sbux), and J.M Smucker (SJM) the producer of Folgers and Dunkin Donuts (DNKN) Coffee were forced to raise prices last year. Coffee sits now at the yearly low at $2.15 a pound and nearly a full dollar off the highs.
Half full or half empty depends on your perspective. More expensive Coffee prices passed onto the consumer shows renewed ability to pay after the demand depression in 2008-2009. Actually, the record price of $3.40 a pound in 1977 would translate into over $12 if you adjust the 35 year old price for inflation.
The real cost of Coffee is near $35 for many. A tradeoff has taken place for Americans addicted to Joe. Many banks and financial institutions make substantial profit from giving customers access to their money when they actually don't have any. It amounts to $124 a year for every American over 18 years old that usually has a bank account.
In a lucrative tradeoff in overdraft fees took in nearly 30 Billion dollars last year, down from 37 Billion, as the penalty costs jumped to $30 when you buy that morning Coffee before enough funds hit your account. The addiction is extra painful when you read the account statements and now pay for that "free cup". Unfortunately, it is not the one commodity, Money, for another transaction that most people planned for. It makes Coffee really, really expensive
Follow Resource Alerts for specific recommendations and trade management instructions.
July 2012 Crude (CLN12) 110/115 call spreads at 152 points ($1,520): A tight $6 range for the last month sets up a price breakout. The $98 support continues to hold on selloffs. A rally run above $102 to test $104 set up a breakout run. The technical pattern targets $110 on a bum rush through resistance. Asset rallies in Stocks and Gold point to more upside. The position sits at 115 points ($1,150), which represents a 24% loss. HOLD.
June 2012 Gold (GCM12) 1750/1825 call spreads at 15 points ($1,500): Half of the spreads were sold at $1000 profit per position last week. The push above the $1675 October lows targeted the next upside at $1725 the $1750. New relative highs at $1800 months ago still set a goal at $2000 an ounce on a breakout of the trading range. The move above previous congestion at $1,680 sent prices higher to the $1,750-plus and a resumption of the upward trend on the last major upswing. The position sits at 25.7 points ($2,570), which represents a 71.3% gain. HOLD.
March 2012 Aussie Dollar (ADH12) 105/110 call spreads at 160 points ($1,600): Last Monday's print at 105 put the play At-The-Money. The Jan 2nd highs were taken out this week on the upside and pushed to 106 plus. The 104 then 102 level needs to hold as support on this climb higher to see the upside breakout extend. The 100 level below that is next on the stair step support. The Dollar topping movement adds to breakout potential with further unwinding. The resistance above at 105 highs sets up attack on 106.50 then 110 highs. The position sits at 180 points ($1,800), which represents a 13% gain. HOLD. Watch 106.5 level for $1000 potential profit point.
July 2012 Corn (CN12) 700/850 call spreads at 32 points ($1,600): Bounce off $6.00 has rallied Corn 50 cents in the last two weeks. The high expectations crushed prices on the disappointing USDA report results. Corn prices crashed back to the $6.00 breakout area with the spring plant ahead. A nearly $1.00 cent rally in the past month priced in crop production losses that never materialized. The $6.00 weekly pivot reversed losses last month to build a base. Only a move back inside the range from $6.80 to $6.50 lows Oct 11 is a good sign to test recent highs again. The breakout above that highs at $8 projects a run to double-digit $10 Corn. The position sits at 22 points ($1,100), which represents a 31% loss. HOLD.
October 2012 Sugar (SBV12) 25/31 call spreads at 135 points ($1,512): Monthly highs at 24 cents last week were again reversed lower. A bottom needs to be confirmed with a follow through run above 24 cents after a month long base. Sugar prices held again the critical quadruple bottom at 22.5 cents area. This was also the September and October three-month lows. This support base also coincides with the June breakout that rallied to contract highs at 26 cents. The previous upside resistance levels at 25 and then 25.5 are now areas to watch for breakouts. The position sits at 100 points ($1,120), which represents a 27% loss. HOLD. Watch 27 cent level for $1000 potential profit point.
March 2011 Canadian Dollar (CDH12) 100 call at 160 points ($1,600): Half of this play was sold at 100% profit to reduce the trade risk to the ZERO exposure level. CD$ prices had rallied to the 101 area to fill our standing exit order months ago. The upside resistance sits at the highs above 100. Support sits at the 98 area for now. The first upside target at 102 puts this play deep IN THE MONEY. The highs at 106 and low at 94 near term upside objective at 100, which is our strike price. The position sits at 100 points ($1000), which represents all profit after the 1st half sale. HOLD. Watch 101 level for $2000 potential profit point.
March 2012 Silver (SIH12) 47/48.5 call spreads at 32 points ($1,600): This limited risk Silver option can only get better from here. New Silver relative lows below $30 have buried the metals. Only a bullish move above $35 again revives trend. An almost three-month trading range between $44-38 led to a price breakdown to $30 in a few quick days. The extreme low hit $26 before bouncing back to above $33 again after a stall a couple weeks ago. The position sits essentially worthless which represents a 100% loss. HOLD.
It ALL Comes Back to Commodities!
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Alan Knuckman can be followed on Twitter at twitter.com/AlBk2Comodities .