How To Play This Government Report And The Ensuing Commodities Craze
Monday, July 13, 2009
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report and Editor of Triple-Zone Profit Trader and Instant Money Trader
Today, I want to focus on specific markets that heat up during the summer thanks to the less-than-reliable nature of weather.
Since many of these commodities are real physical products that we use for consumption purposes, it’s no surprise that these markets rise in price whenever investors suspect an oncoming deficit.
Specifically, grains and other foodstuffs are at the mercy of Mother Nature from the time they are being planted until they can be brought to market. Right now is one of those critical periods, and with that in mind, we’re going to discuss the sectors that are most volatile during these summer months.
Get Going With The Grains
Applied to the commodities market, “the grains,” consist of corn, wheat and soybean futures and options contracts. We see the most speculative interest in these markets from all kinds of participants as what happens often happens fast, with big rewards for those people who know how to play it right.
From May to October, the grains go through their most critical growing cycles, when they rely heavily on ideal weather conditions in order to produce the most bountiful crops.
Of course though, we all know the weather doesn’t always remain ideal just because we ask it to.
And even when the sun does shine when it’s supposed to and the rain falls perfectly on schedule, there’s usually one reason or another to forecast doom and gloom… a shortage of one element, an over-abundance of another, factors that can hinder the crops from meeting their full potential.
Those same variables that have farmers tense and impatient during the summer months, give investors plenty of opportunities to profit though, as the uncertainty more often than not leads to manic moves in the market.
Why The Bulls Are Set To Run Once Again
Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.
Right now might be one of the best times to get into the grain markets on the long side. Not only are we right smack in the middle of summer - a season known for it’s weather anomalies - but the prices of corn & wheat have just undergone a five-week massacre to the downside.
With corn and wheat futures hitting very oversold levels, it makes your chances of being profitable with a bullish trade, that much more probable.
If you need further proof, take a look at the daily charts below of December 2009 corn & wheat futures contracts.
Notice how each commodity appears to have fallen off a cliff since early June. This was due to the most recent government supply/demand data showing sizable supplies and planting intentions for each.
Their Panic Is Our Profit
Over my 17 years in the commodity business, I’ve found that nothing can get in the way of a bull run whenever there is a perception that a crop will get wiped out if growing conditions aren’t perfect. It happens every summer, and this one shouldn’t be any different.
If you’re on board with me in this and want to take part of the speculative fever, then your best bet is to go with options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). Stick with limited-risk call option strategies that are for the December 2009 expiration cycle or beyond, as they provide enough time for any major weather scares to still produce a good upside run.
You can look at the December 2009 corn options with strike price levels from $3.50 and higher. And use the December 2009 options that have strike prices of $5.50 and higher for wheat.
Outright call option purchases and call option spreads are a great way to get your feet wet in these markets.
Soybeans, which probably see the most volatile moves during the summer, did not get hit as hard to the downside recently as corn & wheat, so the advantage isn’t as high in that product right now for bullish bets.
Although soybeans could rise as well with any weather interruptions, we like the chances better with corn & wheat.
Orange Juice Futures Could Still Climb Higher
On a final note, I want to draw your attention back to the analysis we did on the orange juice market in the last Commodities Corner.
Right on cue, orange futures have blasted higher in the last few sessions to the tune of 1800 points, putting any recent call option purchases from last week squarely in the black.
This market could remain active over the next few months as the weather, in the form of hurricanes, can send this market to dizzying heights.
Good trading!
Lee Lowell
Editor, Triple-Zone Profit Trader and Instant Money Trader
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