Cotton market up by around six cents over last 3-weeks
15 Sep '07
3 min read
The combined value of these options currently amounts to 5.76 mio dollars. There is obviously a decent amount of bets being placed on a roaring bull market in cotton. This is distinctly different from last season, when at the same date a year ago there was nobody even remotely interested in forward cotton prices and the entire open interest in 'red' Dec calls amounted to just 16 contracts.
Even though the open interest in futures has 'only' risen by about 30'000 contracts compared to a year ago, from 175'000 to 205'000 contracts, there has been an explosion in the open interest of options. While on September 12, 2006 there were a total of 194'093 options open (125'126 calls and 68'877 puts), we currently have 498'336 options in play (270'410 calls and 227'926 puts), more than 2 ½ times as many as a year ago.
This can partly be explained by the wide price swings seen recently, which bring additional strike prices into the picture and perhaps prompts traders to use options instead of futures, but we certainly have an element of the 'gold rush' mentality in the mix as well.
While speculators are fairly enthusiastic about the cotton market, the trade remains rather skeptical of these higher prices and continues to sell into rallies. According to the most recent CFTC report of September 4th, "commercials" held a net short position in futures and options of 13.5 mio bales and this position has grown even larger since then.
Part of this trade short position in New York may be held against some of the 6.1 mio bales of unfixed on-call sales, while another part represents hedges against physical long positions, such as US old crop and Brazilian new crop.
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