DeCarley Trading - Futures, Options, Integrity

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This newsletter was emailed to DeCarley Trading clients on December 3, 2011. 

Euro Futures Grains and Energies


Thank you for choosing DeCarley Trading.  We are proud to offer the DeCarley Perspective as an informational guide to our clients and subscribers.  We hope that you walk away from the newsletter with a better understanding of market fundamentals, as well as technical and seasonal factors. 

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • Bullish tilt in the Euro going into year's end
  • Year-end tax liabilities could prevent farmers from further selling of grains
  • Mixed seasonals in energies...but can seasonally weak dollar and higher stocks keep things afloat?


Euro Currency Futures

It has been a dramatically volatile year in the Euro as traders struggle with the importance of an interest rate differential (which has favored the currency) versus the chance of a collapse of the European economy and possible dissolution of the multi-country currency. 

One thing is for sure, despite all of the negative banter surrounding the Euro on television news stations, internet blogs and in the general public it has managed to avoid a complete fall-out.  In fact, the currency has yet to trade lower than the high 120's and therefore, hasn't been anywhere near the 2010 low.  This just goes to show you how markets work...if "everyone" is expecting something, it typically doesn't happen and the trades that appear to be "easy" and "obvious" tend to prove the complacent wrong. 

Seasonal studies also support the idea of a possible December Euro rally.  Seasonal tendencies for the Euro have historically been bullish, the gains are often attributed to U.S. multinational corporations selling their dollars and buying foreign currencies to make fiscal year-end book adjustments as well as pay incentive bonuses.    However, be aware that the trend often changes dramatically in early January so Euro bulls should not overstay their welcome. 

In recent years, a net long or short position by Reportable non-Commercials (large speculators) of 100,000 has been the kiss of death for the current market trend.  In the latest COT report, the combined futures and options net short position in the Euro by this group was 96,928.  This doesn't guarantee the bottom is in, but it certainly makes a strong argument for being prepared for one. 

From a chart perspective, there does seem to be a much better than 50/50 probability that moderately new lows (or a retest) will be made in this move before what we expect to be a relatively large short squeeze will be possible.  Specifically, although we are bullish we don't like the idea of "betting the farm" just yet...we are looking for a possible dip in the December Euro to support levels near 132, and possibly as low as the mid 131's before we can be comfortably bullish.  Should such a dip occur, we feel traders will be presented with an opportunity to establish bullish positions with the preferred strategy of short puts, or long calls, long futures or a combination of the three.  Stay tuned for specific recommendations.  In the meantime, we currently have a short option strangle recommendation open from November 29th in which we advised clients to sell the 141/122 February strangle for about 63 ticks in premium or $787 per strangle.  Assuming the trade is held to expiration, the max profit of $787 before commission is realized if the futures price is anywhere between 141 and 122.  Short option traders face unlimited risk beyond the break even points of 1.4163 or 1.2137.

 Euro Currency Futures Trading Chart

Corn and Soybean Futures

The grain complex has been crushed in recent months at the hand of uncertainty over the European debt crisis and expectations of slowing demand out of China.  Although we weren't expecting the weakness to be nearly this profound, we have to assume that at some point the market will begin to behave a little more "normally" based on historical precedence.  After all, much of the September selling was due to fund liquidation as traders scrambled for liquidity in a dramatic "risk off" trade.  However, things might be different now.

Europe is beginning to stabilize, ok that might be a strong term...but they have at least kicked the proverbial can down the road and this could give the markets (and governments) the time they need to work out debit problems.  Also, the grains followed stocks and commodities lower in September/October but have failed to benefit from rallies in risky assets.  At some point, either equities and commodities such as crude oil need to be re-priced, or grains must gain footing and move higher to reflect the support provided from outside forces. 

Additionally, the most recent COT report suggests that small traders ("dumb money") are comfortably short, while large specs ("smart money") are only moderately long.  This tells us that price are vulnerable to a short squeeze, forcing the small specs to the sidelines and even more significant could lure the large specs back into the "risk on" grain trade. 

One never knows when or where the lows will  be (like we said, we thought for sure they would be here by now),  but with the looming USDA report on Friday this seems like the perfect time to begin looking for things to turn the corner.  Perhaps also playing a factor in the possible turnaround is a notoriously bearish December for the greenback; as we know, a weaker dollar makes U.S. exports more attractive and, therefore, provides price support. 

We see significant support in the March corn contract near $5.70 per bushel and believe that at some point this spring we will all look back and realize corn under $6.00 was cheap!  If we are right, a typical technical bounce could see about $6.25/$6.30 but we think there is a good chance at a sharp rally into the $6.80/$7.00 range. 

Soybeans seem even "cheaper" than corn at current levels but if corn tests mentioned support that could mean a trip just under $11.00 in soybeans.  Accordingly, we feel like such a move would eventually be a great opportunity for the bulls. 

Now might be a good time to consider deep out of the money long call options using the March options in both soybeans and corn.  We realize that we tried this a few weeks ago and things haven't panned out.  However, the beauty of such a trade is that there is still plenty of time for things to change and the risk is limited. 

In March corn, we like the idea of buying the $6.90 calls for about 6.5 cents or $325 and in March soybeans we like the idea of adding to our existing long $14.00 calls with the purchase of the $13.40's for about 6 cents or $300.  Keep in mind, these are lottery ticket plays with 84 days to expiration...nearly a lifetime in "grain speak".  A higher probability trade, but perhaps less lucrative would be to look for an opportunity to sell soybean puts on further deterioration and preferably an uptick in volatility.  Stay tuned for specific short put recommendations. 

 Corn Futures and Options Trading

Soybean Futures Seasonal Chart

Energy Futures and Options

As we've noted in previous editions of the DeCarley Perspective, October and November are typically bearish times of the year for crude oil.  However, this time around we've experienced the exact opposite scenario.  Coming into October stocks and commodities were rather dramatically oversold and both asset classes have benefited from a sense of stability after several weeks of panicked selling.  Accordingly, trade completely disregarded historical tendencies and focused on European headlines.  However, we feel as though the counter-seasonal trade will be temporary and things will soon get back to "normal". 

A "normal" December for crude oil often means higher prices beyond the middle of the month.  This (and economic jitters) leaves the market vulnerable to what could be short-term selling, but if it arises we have to begin looking higher.  After all, Brent crude is still trading at a healthy premium to WTI (domestic) and seems to be poised to move higher...this should drag NYMEX crude with it at some point.  Also, our expectations of a weaker U.S. greenback throughout the month of December should at minimum keep a floor under pricing.  After all, inventory numbers have been coming out a little tighter than expected and with the global collusion aimed at solving the European debt crisis there seems to be less concern over slumping demand. 

From a technical standpoint, we'd like to be bulls on a dip to the mid-to low 90's if seen.  Support lies near $98.00 and then again just under $94 in the February contract. 

Depending on the climate, we'd likely be comfortable selling puts on a move to the later.  Keep your eye out for a specific recommendation. 

In the meantime, on November 28th we recommended that our clients sell the February crude oil 120 calls with the 72 puts for a total premium of about $1,000 before commissions and fees.  This trade is currently profitable by about 20 cents and has 45 days to expiration. 

On a side note, natural gas has been quietly falling under the radar of most.  Abundant supplies and lack of expectations for extreme winter weather have kept any rallies in this arena in check.  However, history suggests that rallies in this market are sudden and sharp.  Unfortunately, if you aren't in before the move occurs you've probably missed it.  For this reason, we like the idea of buying cheap calls with a lot of time to expiration...just in case.  On November 16th we recommended buying the February $4.50 calls and thus far they haven't done much for us.  Nonetheless, there is still plenty of time for things to change.  If you didn't take the original trade, you might want to consider the $4.30's for about $300.

Crude Oil Futures Trading and Option Selling

Natural Gas call options

DeCarley Trading

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

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