Coffee futures can provide for some very exciting rides during certain times of the year… Many of these times coincide with weather in South America during planting, harvest etc. since Brazil is the largest producer of coffee and coffee plants can be quite sensitive to frost at certain stages.
Coffee beans are the seeds of cherry-sized berries, the fruit of the coffee tree. There are two main types of coffee beans – Arabica and Robusta. Arabica coffees which make up the bulk of world production are grown primarily in the tropical highlands of South and Central America (Brazil and Columbia). Robusta is not as mild as Arabica and is grown in Africa and Asia. Coffee has a strong seasonal tendency to peak in May before the Brazil harvest. Prices tend to decline through the summer months and bottom in August as inventories are built up ahead of winter. The demand for coffee is inelastic which means that as coffee prices rise, people do not reduce their consumption.
I have seen coffee make some amazing moves both up and down with tremendous volatility and then fall back into low volatility, much tighter ranges.
The coffee market as of recent, has been trading with about 15,000 contracts per day which is not bad for SOFTS (Sugar is the leader among softs as far as volume). That allows for traders to utilize futures, futures spreads among different months, as well as options on futures.
This past week we witnessed a break to the down side. The market broke below the 161.50 support level and at the time I am writing this, we are trading at 149.50 (basis the May contract). This is a major bearish signal and while many traders are “bottom fishing” (speculating on possible weather hazards) I see this break down as a sign that lower prices are still ahead, possibly going through May.
Looking at the weekly chart below I see the next target of 127.60. I will remain bearish this market unless I can see prices above 163.22.
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My preferred approach on this one is to sell futures on a bounce ( 155.00 area?) and use call options as partial hedge to the future position. Another method that may be suitable for those of us with a more sensitive stomach is to use vertical put spreads, buy a put option that is closer to the money and sell a put option that is out of the money.
Many ways to trade any market, many ways to lose money in any market and only very few ways to lock in gains – this one is not different. If you need help creating a trading plan, visit our broker assist services.
Disclaimer – Trading Futures, Options on Futures and retail off-exchange foreign currency transactions involve substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more of your initial investment. Opinions, market data and recommendations are subject to change at any time.
About Ilan Levy-Mayer
Ilan Levy-Mayer has been a commodities broker for over 15 years, and holds an MBA in Finance and Marketing from the Hebrew University in Jerusalem. Ilan is currently the Vice President and a Senior Broker at Cannon Trading Company.
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