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Commodity Futures: Playing The Grains & Orange Juice Markets
by Lee Lowell, Advisory Panelist
Saturday, August 1, 2009: Issue #1056
I’d like to focus today’s segment on the markets that typically see heightened activity during the summer months, due to the fact that it’s their prime growing season.
Specifically, that means the grains and orange juice markets.
As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.
These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.
So let’s hit the grains market first…
How To Play The Grain Market Upside With Commodity Futures
A few weeks ago, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.
“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”
Both commodities markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…
Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.
If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.
Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk and unlimited reward possibilities.
For example, that could include entering a call option spread or just buying call options.
For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.
- Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.
- Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.
You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.
The Orange Juice Markets – A Hot Spot For Speculators
Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.
At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”
It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.
This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.
So what now?
At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.
Let’s take a quick look at our other favorite “weather-prone” commodity – natural gas…
Commodity Futures – Waiting on a Natural Gas Bull
We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).
Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.
Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.
One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund – United States Natural Gas (NYSE: UNG).
This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.
And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.
That’s all for this time.
Good investing,
Lee Lowell
P.S. If you’d like to find out more about profitable option transactions, take a look at The Instant Money Trader.
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2 Responses to “Commodity Futures: Playing The Grains & Orange Juice Markets”
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Along with Karim, Lee is one of America's leading options professionals. Over the course of a distinguished career, which includes six years in the options "trenches" as a market maker on the floor of the New York Mercantile Exchange (NYMEX), he has developed a proprietary trading method capable of enormous upside while actually reducing risk. 
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August 22nd, 2009 at 3:36 pm
Good atricle,
I like the view on natural gas.
What are the ways I can be long the commodity, so as to benefit when prices eventually recover?
Do long term call options exist for this market, the way LEAPS exist for equities?
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September 30th, 2009 at 10:19 am
Id love to go for a hands on training on commodities. one on one if possible. please contact me if possible I’m tired of working for others.
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