Sugar Sweet Sugar
Selling put options again

The idea to sell put options on sugar is still alive. I know, I know, we have already had it here. Personally, I wanted to present other markets as well, but sugar still offers very good chances. If you like to explore new areas, there is nothing to worry about. I will present other markets on this blog in the near future.

Sugar market is ripe to collect option premium

Brief glance at the latest news

Getting back to sugar, let’s first have a look what changed in the fundamentals.

The current forecast for world sugar production is 179.3 million tonnes in 2017/2018. This is a very high supply of sugar. However, looking at it in more detail, one can see that the forecast back in May this year was 180 million tonnes, which is pretty much confirmed now. The point is, between the May forecast and the current forecast, the price of sugar fell about -14%. This might indicate that the high production of sugar is already reflected in the price.

Storage of sugarBrazil is by far the biggest exporter and obviously, it seems that this year, the production is good. However, they have some room to use their sugar cane either for producing sugar or ethanol. They chose that product which brings higher prices and this creates a certain balance on the market. If the price of sugar is too low, Brazilian mills reduce the production and the focus lies on ethanol.

Indeed, Brazil, India and Thailand are the countries to follow when trading sugar. India is also one of the major Crashing sugar caneimporters of sugar. Hence, the more important to pay attention on this part of the world. Currently, there are some hopes that India will increase the demand for sugar to satisfy their domestic needs.

Besides that, the weather in Southeast Asia is changing. First, there were concerns in August that the weather was too dry. Now, there is too much rain (more than normal during the monsoon season). Nevertheless, despite some damages of the crop, the production is still expected to be very good.

Those are the fundamentals. If you know more, write me in the comments below.

Reasons to sell put options = betting that prices will not decrease

The majority of signs supporting the idea of selling put options, discussed in my first post, is still valid. If you missed it, click here to get some more background.

Comparison: 2017 chart of sugar futures and the seasonal chart of sugar
For illustration: The upper chart shows the price development of sugar futures as from JAN to SEP 2017. The lower chart is the seasonal chart of sugar. One can see the similarity.

I will very shortly summarize the positive signs below:

  • Sugar chart builds a nice bottom and does not continue to fall.
  • Seasonally, the price of sugar should begin to increase as of the second half of September. This year, sugar was behaving exactly as its seasonal chart shows.
  • The commercials are long which for me indicates raising prices.
  • The implied volatility of sugar is still relatively high. It is above 40% of what were the values in the last 12 months. This means that the options are relatively expensive.

One sign does not say much, but once you connect them together, they give me a pretty clear picture as what to do.

My action

I see the opportunity in selling put options on sugar “SB” for JAN’18 (expiring on 15 December 2017) at the strike price 0.1275 while collecting a premium of  $134.4 per option.

If you hear the word “option” the first time in your life, click here to broaden your horizon or feel free to contact me.

I will post an update of this trade once there is something to report. Stay tuned.

Last but not least, to provide you some information on what I have on my mind. I will share where else I currently see chances to sell options. Maybe, you will find it useful.

Crude oil and coffee are in focus

I follow very closely two other markets. Those are futures on crude oil and on coffee. These both have been very bullish in the last days. However, I think these markets will not go up for too long. The reason is very simple, the supply of these commodities is huge. I am still not involved in these markets because the green light is not yet on. For example, the implied volatility of crude oil is very low. That means that the options are currently cheap (I want to sell those options, hence ideally they would be expensive). Plus, the markets go currently up and I do not want to step in front of a running herd of bulls.

As soon as I see a concrete opportunity to sell call options in these markets, I will let you know through this blog.

 



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