With sugar futures extremely oversold, here is a safe and relatively cheap sugar options trade with defined risk with unlimited potential profit, from Carley Garner.
The sugar market is starting to look cheap. We have seen it trade much lower, of course, but it rarely holds under 12¢ for long. Further, we have noticed the relative strength index (RSI) is below 30, which is an indication of oversold conditions, an, in the past, has triggered large short-covering rallies. Those of you following the Commitments of Traders (COT) report issued by the Commodity Futures Trading Commission are likely aware that sugar futures speculators are holding a historically large net short position; this generally translates into a trend reversal as selling dries up (everyone who wants to be short is already in) and the bears lock in profits.
We like the idea of a long-term and limited-risk play in the sugar market. It is possible to get a foot in the door without losing sleep through the purchase of a March sugar 12.50 call. The cost is roughly 46 ticks or $515 before transaction costs. This represents the maximum risk of the trade and will occur if the option is held until expiration and the March sugar futures price is below 12.50¢ (see chart).
The profit potential is theoretically unlimited but we will be happy if the premium doubles or more. This option was in-the-money in late August and worth nearly double the current value.
This option has 160 days until expiration, that is a substantial amount of time to be in the market with relatively little risk. In our view, this gives speculators plenty of time to be there if something happens.
Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com. She has written four books, the latest is titled “Higher Probability Commodity Trading” (July 2016).