If you are someone newer to trading cocoa futures, I wanted to share a strategy that has worked well for me lately - call option spreads. I know many of you are experiencing with options, but hopefully, this provides a helpful overview. First of all, one of our favorite addictions (chocolate) is mostly grown in West Africa. Why are Ghana, the Ivory Coast, and Nigeria so important for global cocoa production? West Africa is so important for cocoa production for a few key reasons: Ideal climate - The warm, humid climate in countries like Ivory Coast, Ghana, and Nigeria provides excellent conditions for growing cocoa trees. Abundant rainfall and temperatures between 21-32°C are optimal. Historical dominance - West Africa has historically been the global leader in cocoa production since the 19th century. The industry is well-established which leads to efficiencies. Land availability - West Africa has significant amounts of arable land that is suitable for expanding cocoa cultivation. Farmland is more abundant compared to other regions. Proximity to ports - Major cocoa producers like Ivory Coast and Ghana have close access to Atlantic Ocean ports, facilitating export to global markets. Labor supply - The population density in West African countries provides a suitable labor force for labor-intensive cocoa harvesting and cultivation. Government support - Some countries provide subsidies, training programs, and research to support their strategic important cocoa sector. Pest and disease resistance - Cocoa varieties grown in West Africa have developed some resistance to major threats like cocoa pod borer and Phytophthora diseases. However, over the last 5 months, an extraordinary amount of rain has caused disease issues in West Africa and slowed the harvest down. With El Nino, the supply deficit could be the worst in decades. I started experimenting with call spreads as a way to benefit from rising cocoa prices while defining my risk. This could be a game-changer strategy if you happened to have gotten burned buying an outright call option on a futures contract, that was either too expensive or never went in the money enough for you to profit on it. By capping profits in a long call option with a short call option, you limit the trade cost and know the maximum loss amount you can make and lose. Source: Barchart.com Of course, we all love those huge vertical price moves. However, given that we have already seen a 35% move up in cocoa with a record COT-long position, this is a safe trade. You can still make 3x your money on a potential squeeze situation in cocoa. Call options work best when the premiums are high due to increased volatility and higher prices—for example, buying the March 2024 3900 cocoa call and selling the 4300. Source:Wikepedia This is what I told WeatherWealth clients to do a month ago, before the latest 13% rally in cocoa. Here’s an excerpt: I'm sure many of you have nailed the strategy and timing of spreads over the years. Feel free to chime in with any tips. We all succeed faster when we share knowledge and stay humble. I'm thankful for this community of passionate traders! Jim Roemer www.bestweatherinc.com
Your performance comment in the latter part of your post is nitpicking a past example where a forecast turned out to be true. Great, but not indicative of your forecasting skills nor the value of whatever you are selling. If you believe you have an edge in forecasting and placing options trades you should probably rather open a hedge fund or trade your own capital, or otherwise do what you currently do but publish the occasional forecast in REALTIME for everyone to evaluate and see. Second, your comment on still being able to profit despite the run up in cocoa prices is lacking any sort of risk analysis. Sure, anything can happen but what is the current implied probability of another squeeze vs a correction and forecast of easing of cocoa supply. You would add value to your promoting a product if you highlighted not just the payoff potential but the probabilities of attaining such and risk as well.
Thank you. Very nice comment. I am happy to send you some of my reports with trading ideas. I have advised a $6 billion hedge fund for 20 years. Jim Roemer
Always check when the uptrend started first. The uptrend started a year ago. Now it is in the rising channel.
This is a 6 day chart of a (mum 4 now) stock. Top to bottom is about $12. You wouldn't short this would you? ----> But I will. Because fundamentals, volume, sector, all matter. This pig is gonna take out that low in 2 weeks.