RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

In all of our past month-and-a-half’s updates, we’ve discussed that while the technical elements typical of major peak/reversal environments like waning momentum, frothy sentiment and a potentially complete wave sequence are present, the market hasn’t provided the commensurately larger-degree proof of weakness to contend that the price action from early-May’s 6.38 intra-day high or 6.36 high daily close is that of a reversal, rather than a major bull market correction.  Per such, long-term commercial players still have to acknowledge and be flexible to either directional outcome.  A fact important to the effective navigation of this correction-vs-reversal dilemma however is that the market is currently wafting around the extreme lower recesses of the past couple months’ range, providing a unique and compelling risk/reward opportunity for those, like end-users, who need or want to take a bullish position.

Looking at the daily log close-only chart of the Dec contract above, it’s easy to conclude that this month’s decline from 10-Jun’s 6.15 high close is either the completing C-Wave of a major bull market correction from 07-May’s 6.36 high OR the dramatic 3rd-Wave of a major reversal lower.  A clear break of 25-May’s 5.16 low and exact 61.8% retrace of Mar-May’s 4.53 – 6.36 rally will reinforce the peak/reversal count and expose potentially steep, sustained losses thereafter.  IF, alternatively, the past couple months’ thus-far-lateral price action is (4th-Wave) consolidative, then somewhere along the line this market needs to, first, stem this month’s downtrend with a bullish divergence in short-term mo above 18-Jun’s 5.75 smaller-degree corrective high and short-term risk parameter AND THEN sustain trendy, impulsive price action higher thereafter.  In effect, we believe the key shorter-term directional flexion points are at 5.75 and either 25-Mays 5.16 low close or 26-may’s 5.00 intra-day low.

Given the importance of the 5.16-to-5.00-area that HAS to hold as support for any broader bullish count to have a chance AND as a key risk parameter to any bullish decisions, again, current levels and conditions provide a favorable and objective risk/reward setup for those who need or want to take a bullish stance.

END-USER BULL HEDGE:  AUG SHORT-DATED 5.40 – 5.10 PUT SPREAD / AUG SHORT-DATED 5.80 CALL COMBO

For end-users in particular, we believe this strategy has excellent risk/reward merits under the circumstances, especially given the opportunity to cover this hedge on a post-report break below 5.00.  This strategy involved selling the Aug Short-Dated 5.40 – 5.10 put Spread for about 15-cents and buying the Aug Short-Dated 5.80 calls around 16-1/2-cents for a net cost of about 1-1/2-cents.  This strategy provides:

  • a current net delta of +47%
  • favorable margins
  • maximum risk/cost of 1-1/2-cents if the underlying Dec contract settles anywhere between 5.40 and 5.80 at expiration 25 days from now on 23-Jul
  • fixed/maximum risk/cost of 31-1/2-cents on ANY plunge below 5.10, and
  • unlimited, dollar-for-dollar upside hedge protection above its 5.81-1/2 breakeven point at expiration.

With what will be 23 days between Wed’s crop report and the Aug short-dated option expiration, the difference between “today’s” P&L of this strategy indicated by the red line in the graph versus the P&L at expiration (green line) is an important one.  For while the maximum risk/cost on a resumed plunge in the underlying is 31-1/2-cents if no action is taken, covering this strategy on a technical break below 5.00 could reduce the risk/cost of this strategy by a third or more.

Please contact your RJO representative for an updated bid/offer quote on the Aug Short-Dated 5.40 – 5.10 Put Spread / Aug Short-Dated 5.80 Call Combo.

RJO Market Insights

RJO Market Insights specializes in forward-thinking analysis, focused on potential market-moving events and dominant factors driving price discovery. Detailed fundamental and technical coverage across multiple commodity sectors is combined with objectively-constructed trade recommendations to provide an industry-leading product for R.J. O’Brien’s Institutional clients, commercial hedgers, introducing brokers and individual investors free of charge. Content is distributed in both text and audio formats, with specialized service offerings provided by account type.
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