Tuesday’s Top Commodity Trades for 2020

Go KC!

No, not the Kansas City Chiefs (who are #1 in the West) but /KC Coffee Futures, which are number one for our readers with a big $15,000 per contract gain at $142 - up from our September 25th entry at $100.  The lowest we dipped was $95.80, back in mid-October (/KCH20 is +$3 to the front-month chart) – staying just above our $95 stop line for the whole run and finally blasting off this month, well past our $122 goal.  At the time, I said in the Morning Report:

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.

So, if the instructions were followed correctly, that's at least 2 contracts that are up $42 each for over $30,000 in gains in 3 months against a $3,750 risk – not bad for a quick commodity trade, right?  For those who are future-challenged, we also had a trade idea for the Coffee ETF (JO) as follows:

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:
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.

Clearly we can expect the full $2,000 to be paid out in March, as planned, and already the $30/32 bull call spread is $14.75/12.83 for net $1.92 ($1,920) out of a possible $2,000 and the short March $30 puts are down to 0.08 ($40) so net $1,880 can be taken off the table now with a $1,480 (370%) profit 3 months early – so why not?

We don't publish commodity trades often in our Morning Report as they are generally very risky, so we like to have a very strong premise before making a call.  The Sept 25th Report was following up on our May 10th call to go long on Soybeans, getting into the September Futures (/ZSU19) at $825 and they finished at $919, up $94 per contract and Soybean Contracts pay $50 per $1 move so +$94 translated into gains of $4,700 for each /ZSU19 contract while our option play on the Soybean ETF (SOYB) was:

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, although it an be tough betting on Trump here, 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:
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, we hit our $16 goal on the button in October and the short puts did indeed expire worthless so net $10,000 (not $7,500) on the trade was a gain of $9,250 (1,233%) on that trade as well – you can see why we like to play with Futures Contracts to pass the time away…  We are done with Cofee and Soybeans now but Orange Juice is still in play and the September /0JU20 (not /OGU20) contracts we liked back on 9/25 at $114 are down to $109 and, at $150 per contract, that's a loss of $750 each so far – not our best pick.

Overall, we still think this is bottoming action and, unfortunately, OJ does not have an ETF to play so we have to stick with the Futures play and hope for a poor crop report to bring those Large Traders back to the bullish side.  Things do generally bottom out for /OJ in Q1 and our contract is good to September.  What's holding prices down now is Brazil's Real, trading at just 0.25 to the Dollar is making a large portion of the import crop dirt cheap – so cheap that the Government is talking reform to fix it (they've already intervened to stop the slide) - which would be great for our /OJ futures.

Between that and potential Chinese demand – we may actually have a trading premise here.  Unfortunately, you never know with commodities so keep in mind that each $1 move made on Orange Juice translates into +/- $150 for each contract you play and, as you can see from this year's April collapse – that can be $5 ($750) in a single day very easily.  Of course, we can gain that much as well – which is why we like to call the bottoms – not the middles.

I am not a big fan of shorting commodities as it's easier to pick value and be patient but Palladium has been off to the races for several reason (less Diesel Car sales after the scandal, EVs not catching on as fast as people thought but Hybrids use palladium too), most importanly mine shutdowns in South Aftrica causing supply to dry up recently.   That SEEMS to be getting under control and the move in Palladium from $900 an ounce last year to just under $2,000 this year is very likely overdone.

Palladium does have an ETF (PALL) but it has no options so you just have to short it – now $185.79 with a stop above $200 or if Palladium itself tops $2,000 but I think we should get a rejection around here – back to $1,900 ($175) for a 5% gain though that's not very exciting so we should look for something with more oomph to play, right?

Though the winter is expected to be mild, Natural Gas (/NG) is way down at $2.32 but, just yesterday, Kinder Morgan's Elba Island Terminal sent out its first container of LNG (Liquefied Natural Gas) and piplines were delivering 8.24 Bcf/day according to NGI's LNG Export Tracker – which is a very significant increase (about 10%) in export demand from that one terminal alone!

“The emergence of this seemingly inelastic demand with a baseload-like pull on domestic gas supplies marks an underlying shift in the U.S. gas market that, along with the rising baseload demand from power generation, will make national benchmark Henry Hub prices more prone to spikes,” RBN consultant Katharine Fraser wrote in a recent blog post.

I'm inclined to agree with her so the way we want to play /NG contracts is to generally just keep ourselves in the game – so we can be there to take advantage of a nice spike when it comes along.  That means scaling in AND out of positions – taking advantage of dips to add more contracts and spikes to lighen back up – constantly lowering our basis.  At the moment, the October Contracts (/NGV20) at $2.335 take us into the start of hurricane season and we don't expect to have them that long but the front-month January Contracts (/NGF20) are $2.325 – so I'd rather pay the extra penny for the extra 9 months.

Natural Gas does have an ETF (UNG) and we can play that conservatively with the following Options Spread:

  • Buy 40 UNG 2021 $15 calls for $4.20 ($16,800) 
  • Sell 40 UNG 2021 $19 calls for $2.70 ($10,800) 
  • Sell 20 UNG 2021 $17 puts for $2.20 ($4,400) 

That's net $1.50 ($1,600) on the $16,000 spread so $14,400 (900%) upside potential on that one and, if UNG does not hold $17, we are forced to buy 2,000 contracts at $17 ($34,000) – so keep that in mind as you might want to just be happy with the $6,000 spread that can make up to $10,000 (166%) without the short puts and only sell them (for a better price) if UNG goes the wrong way and you need to money to roll the longs to a lower strike (more on that if it becomes necessary).  

That UNG play should be considered the first of our "Secret Santa's Inflation Hedges", which I usually roll out on Christmas Eve but this year I'll be in Thailand for Christmas – so I'm going to put out our 4 inflation hedges between now and next Tuesday morning.  

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