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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider.
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money. Losses can exceed deposits on some products.
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Upside potential in cotton Upside potential in cotton Upside potential in cotton

Upside potential in cotton

Trade View 5 minutes to read
Medium Term / Buy
Ole Hansen

Head of Commodity Strategy

Summary:  A significant speculative short-covering potential has emerged in cotton after hedge funds have driven the net-short to the highest since May 2007 following 30 weeks of selling.

Instrument: May19 Cotton option call strike 75: OCT/K19C75:icus
Price Target: 80.00 cents/lb
Market Price: 74.30 cents/lb

Background:
In the week to February 26 the net-short reached 21,000 lots with data covering the week to March 5 being available on March 8. Since peaking at 96.50 cents/lb last June the price on the first month futures contract hit a through at 69.53 cents/lb on February 15 before recovering.



The negative sentiment up until now reflects expectations from several major forecasters such as Cotton Outlook, the National Cotton Council and the US Department of Agriculture that a production surplus, helped by a strong US harvest, will emerge this coming season. 

The recent recovery to the current level just below 75 cents/barrel has partly been driven by expectations of a trade deal between the US and China could trigger increased cotton exports to China.
Parameters:

Entry: Buy the 75 Call on May Cotton, ticker: OCT/K19C75:icus
Stop: Use limit orders
Target: 80 cents/lb on CKZ8 (representing an intrinsic value of $2500 minus premium paid plus remaining time value)
Time Horizon: Before option expiry on April 12

Aprox. cost:  1.5 cents/lb or $800 per contract
Option chain on cotton from the SaxoTraderGO:
Source: Saxo Bank
The May contract (CTK9):
Source: Saxo Bank
Long-term view using the first month continuation chart: 
Source: Saxo Bank
Management And Risk Description:
Going long cotton at this stage reflects a trade that goes against current fundamentals which point to larger US acreage and increasing ending stocks this coming season. The main reason for entering the trade is for a trade deal between the US and China to drive the price higher through short-covering. On that basis we chose to implement the buy through options on the May contract. That way we reduce our risk to the premium paid for the option.

Please note that liquidity can be poor, especially outside US hours. In order to avoid unwanted slippage we recommend using limit orders when entering and exiting the market. We focus on the 75 cents/lb call on the May futures contract but please use the option chain (see example below) on the SaxoTraderGO or SaxoTraderPro for further inspiration.

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A compiled overview of Trade Views provided on Home.saxo can be found here (https://www.home.saxo/en-gb/insights/news-and-research/trade-views/report).

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice or a personal recommendation and does not take into consideration your objectives, financial situation and needs. Saxo Capital Markets UK Limited will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information. We assume no liability for errors, inaccuracies or omissions contained within these materials.

It is important that you understand that with investments, your capital is at risk. We offer leveraged products which carry risk and can result in losses that exceed deposits. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more here.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, or any of our other products work, and whether you can afford to take the high risk of losing your money. The value of your investments can go down as well as up. Losses can exceed deposits on some margin products. Professional clients can lose more than they deposit. All trading carries risk.

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All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

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It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

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