How to Trade the Selloff in Cotton Prices Here

Consider buying a put option on December cotton (CTZ26) futures.

See on the daily bar chart for December cotton futures that prices have sold off sharply this week and negated a price uptrend, to suggest a near-term market top is in place. Longer-term price charts show cotton futures prices were pushing into thin air, historically. See, too, at the bottom of the chart that the moving average convergence (MACD) indicator has just produced a bearish line crossover signal, as the blue MACD line has crossed below the red trigger line.

Fundamentally, inflation worries and high gasoline prices at the pump are starting to take a toll on consumer confidence heading into the fall/winter apparel-buying season. Also, cotton has lost spindle share in recent years as synthetic fibers have gained in popularity among consumers.

Consider buying a put option in December cotton futures, with a downside price objective of 75.00 cents, or below. The option expires on November 13.

IMPORTANT NOTE: I am not a futures broker and do not manage any trading accounts other than my own personal account. It is my goal to point out to you potential trading opportunities. However, it is up to you to: (1) decide when and if you want to initiate any trades and (2) determine the size of any trades you may initiate. Any trades I discuss are hypothetical in nature.

Here is what the Commodity Futures Trading Commission (CFTC) has said about futures trading (and I agree 100%): 

Trading commodity futures and options is not for everyone. IT IS A VOLATILE, COMPLEX AND RISKY BUSINESS. Before you invest any money in futures or options contracts, you should consider your financial experience, goals and financial resources, and know how much you can afford to lose above and beyond your initial payment to a broker. You should understand commodity futures and options contracts and your obligations in entering into those contracts. You should understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you. 

On the date of publication, Jim Wyckoff did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.