Medium Term / Buy
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
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.
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
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.