Sugar Options Commentary 17th March 2010
Published: 03/17/2010, 8:09:00 PM
J&C Commodities
Sugar Options Commentary
17 March, 2010
Paper buys close to 10000 K 20/22 call spreads from 19-21 with some of them hedged vs 1790 in K Fut. Appears to us to be a roll down of long K calls.
- Various Brokers bot 10000 K 20/22 call spreads @ 19-21 (some were laid up with K=1790)
- J&H sd 500 K 16/17 put spreads @ 27 vs K=1790
- MCQ sd 1000 K 1800 straddles @ 190-192
- E Coast bot 1500 N 1750 str @ 300
- JSG bot 1000 K 2150/2300 call spreads @ 5-6
- MCQ sd 500 N 1750 str @ 301-303
- E Coast sd 500 K 2000c @ 28-29 vs K=1790
Commentary
Basically, only 20% of this huge pullback over the last 2 months can be related directly to sugar fundamentals. We feel the slide began when the US$ showed strength due to the uncertainty in Europe and the forced liquidation of those funds who were involved in the US$ carry trade as well as the commodity asset bubble. When that happened was a large amount of defaults on existing purchases took place and trade was forced to liquidate long hedges. Finally, other trade who were trying to argue that the fundamentals were still there had to liquidate because of the unpredictability of the market. Now, we are close to 50% off the highs and confidence is totally shot. Hence we have the reason why other commodities and the Stock Market can rally but sugar follows its own path. Several sources have been pointing out the close similarity of the 2010 market to the 1974 and 1980 bull markets. At those times, we saw huge pull backs from the highs of the move only to see a consolidation in the last 2 weeks of March with the stage being set to a rally to new highs. While the past is by no means a proper indication of what is about to happen, it does serve as a good example of just how quickly sentiment can change.
Options saw over 40,000 calls trade. Many of these were K call spreads where the buyer appeared to be lowering their long strikes. We also saw interest in buying N vol as paper bot the N 2000c and also the 1750 straddles. While that was going on, it appeared some interest in selling time decay in K with the K 2000c and K 1800 straddles.
Our final thought here is that the emotion of this market could change on a dime. If trade does get over the "fear of open water" and realize a deficit does still exist and offtake still has to be booked, we could see a rush back into the market. At the same time, India=16 mmt was probably factored in during the Bull Fest otherwise known as the Dubai Conference so that number was generally accepted even when we were trading some 1000 points above here. Might not be a bad idea to be long wide N call spreads such as N 20/25 and look for a reversal of emotions causing a quick interest in vol and gamma.