| Cotton Futures and Options | | | | challenging |
| COTTON futures and options trade on the NYBOT. | | | | Lumber prices can trend well since supply and |
| (The New York Board of Trade) Cotton has low to | | | | demand are based on various long-term trends. |
| medium volume and liquidity; just enough to get by. | | | | These include U.S. housing demand and the supply |
| An account margin of $1300 controls 50,000 pounds | | | | trade agreements with Canada. |
| of cotton, worth about $30,000. One full point of | | | | Short term trading is possible if you are nimble. Look |
| price movement equates to $500. | | | | for a five-dollar swings as an objective. ($550) If you |
| Day trading cotton futures can be difficult. At times, | | | | get a limit move in your direction, you may want to |
| the short-term charts can make little sense. Cotton | | | | get out of your futures contract. Reversals are |
| futures fills (order execution price) often have | | | | common after big moves. However, if the move is |
| significant slippage while the option fills are slow | | | | supported by long term bottoms and major time |
| coming back from the floor. Market orders will get | | | | cycles, you may want to hold on for what could be a |
| you filled immediately but you may not be happy | | | | big ride. |
| with the results. Obviously, the main problem with | | | | STRATEGY |
| short-term trading cotton is liquidity. | | | | Here's how I look for opportunities in the cotton and |
| Liquidity is not really a problem with long-term cotton | | | | lumber markets: First I generate a TimeLine forecast |
| position trades lasting weeks in duration. Low liquidity | | | | that shows a strong move up or down in cotton or |
| will make little difference in your overall results | | | | lumber. The TimeLine is based on time cycles and |
| because of infrequent entries and exits. Effectively | | | | other preprogrammed patterns. I then determine if |
| using limit orders in cotton will solve the slippage | | | | the move is expected to be choppy, trending, and |
| problem, but makes entry and exits more challenging. | | | | for how long. This helps us focus on possible |
| Normal moves of five to ten cents are common in | | | | directional futures/option positions or writing options |
| cotton. ($2500-$5000) Over the last few decades, | | | | in a range, or even writing options with the trend. |
| the cotton market has cycled within a large price | | | | Next I use automated option software to search for |
| range. The extreme lows are 28 cents to highs of | | | | the best of 1600 strategies based on the expected |
| $1.17 a pound. The goal of many long term traders is | | | | market move. I compare these option to option |
| to catch big moves like this. | | | | combinations against futures to options combinations. |
| Weather is always a consideration when trading | | | | At some point I will find a compromise between risk, |
| cotton. Droughts, floods, disease and insect | | | | profit and simplicity in one or two strategies. In |
| infestation (boll weevils, etc) can propel prices. | | | | hindsight there's always a best strategy we could |
| There's times when cotton trades counter to the | | | | have used. Keep this is mind when narrowing down |
| other grains. (wheat, soybeans, corn, etc) What may | | | | the choices. When finished, we want to have one or |
| be good growing conditions for cotton may be | | | | two potential trades to work with. We call the |
| adverse to the other grains and visa versa. | | | | selected few, "high probability, low risk trades." |
| LUMBER | | | | Remember there is more to planning a trade than |
| LUMBER Futures and options are traded on the | | | | just coming up with a forecast. The market may |
| (CME) Chicago Mercantile Exchange. An account | | | | move as predicted but we can still lose by choosing |
| margin of $1700 controls 110,000 board feet of | | | | the wrong trading vehicles. Pick the right vehicles and |
| lumber worth about $27,000. One full point in lumber | | | | strategies that will allow us to stay in the market |
| equates to $110. | | | | without excessive fear, but still carrying calculated |
| Lumber's forty year low in the 1970's was $94. It's | | | | risk. |
| all-time high was $493.50 after the Mt. St. Helens | | | | We NEED to take on calculated risk or the market |
| volcanic eruption blew out vast amounts of | | | | will not pay us for our services. In addition, the |
| timberland. A $100 move in lumber over several | | | | vehicle has to move far enough to make a profit |
| months is typical. ($11,000 a contract) Limit moves up | | | | without letting the expense of protection eat us up. |
| and down are a very common occurrence. The | | | | Excessive protection (risk avoidance) can come in the |
| liquidity in lumber futures is a problem but tolerable. | | | | form of option premiums, too close-in stop loss |
| Market orders are sometimes necessary, but there is | | | | orders - and overdone, complex spread strategies. |
| a big chance of slippage. | | | | Matching a forecast to a strategy is an important skill |
| Lumber options are illiquid. They are hard to buy and | | | | to succeed in commodity trading. |
| sell. A series of limit moves in your direction will help | | | | Good Trading! |
| you liquidate with a nice execution price and profit. | | | | There is substantial risk of loss trading futures and |
| Effectively using limit orders in lumber will solve the | | | | options and may not be suitable for all types of |
| slippage problem, but makes entry and exits more | | | | investors. Only risk capital should be used. |