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Commodity Chart Of The Day: Cocoa Bulls Beware

Published 10/10/2013, 12:28 AM
Updated 07/09/2023, 06:31 AM

Cocoa futures made a fresh two year high this week but prices appear to be running on fumes and I would not rule out a correction from current trade. This ship is absolutely leaning one way and we all know how that story ends. Let me be clear: I am not calling an end to the bull market but rather a correction back to the up sloping blue trend line as seen on the chart below which would represent a correction in the ballpark of 4.5-5%. With demand increasing in India and Asia as a whole and supplies shrinking there can be a fundamental case made for a trade near 3000 by year's-end if not early 14'.

YTD, cocoa is up nearly 20% making it the best-performing commodity. Even while a majority of other soft and Ag commodities slump, cocoa has been able to shine. I suggest bulls be cautious and, for aggressive traders, to look for creative ways to play a short-term correction south.
Cocoa: December Futures
The Play
December options have just over three weeks until expiration so inexpensive, put premium in my eyes can be purchased. A trade back to the 20-day MA puts futures $125 lower and a run at the 50-day MA—which could happen within that time frame—is a loss of nearly $200.

Those looking for a bit more time or a more significant move are advised to trade March 14' contracts. Perhaps sell futures and sell an out-of-the-money put 1:1. Do not lag this trade when closing the trade...whether futures move higher or lower offset both at the same time when taking the gain/loss. On this strategy I'd be looking to sell puts $100-200 out-of-the-money with a 25-35% delta.

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