Good morning friends
Just wanted to give everyone an update on cotton. March futures are starting to move parabolically again as we test 78 cents this morning. Producers with production unsold that is waiting to be ginned should be looking at put options or some sort of hedge at these price levels.
At current prices of 77.70 – the 77 put is going for about 2.2 cents (1100 dollars) while the 78 cent puts are going for 2.7 cents (1350). If you are long puts at lower levels, you can get fantastic ratios to roll up from a lower strike to the money. Rolling from the 70 to the 75 strike can be done for a little over a penny.
Buying a 77 put option for 2 cents will give you a 75 cent floor through the 9th of February. You could go out and try to buy a 75 cent put for a 1.2, which is a 73.8 cent floor through Feb 9. If you are waiting for cotton to be ginned and can’t sell, using put options is a no brainer in my opinion. It gives you some protection while allowing you to enjoy upside.
If you are already short the board via futures and are sick of the squeeze, replacing futures with puts is your play. DO NOT LIFT HEDGES AND DO NOTHING. YOU RISK LOSING PRICE BOTH WAYS.
More sophisticated traders could look at selling an 82 cent call and buying a 76 put for even money, but please call the desk before doing something like this. Selling calls to pay for puts is a little but like a futures sale but it gives you more range as we come into delivery. 82 cents sounds great today when we are at 78 but if we see 82 in the short run you will be taking margin heat. Again, please call me or Donna if you have any questions on how to use the short side of the board.
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