By Scott Barrie, CFEA (Barrie@grainguide.com)
and Tim Zurick at Countrywide Trading Corporation (Tzurick@ctcfutures.com)
Oranges are grown throughout the
world, though Sao Paulo, Brazil and Florida in the United States are the
only regions which have major processing facilities. Sao Paulo and
Florida together account for over 90% of the worldwide production of
Orange Juice, and more than 50% of the worldwide production of oranges.
Orange trees take three to four
years from the date of planting to begin bearing fruit. Production of
fruit increases until they reach full maturity at approximately eight
years of age. Thus any damage to a tree, not only effects the current
supply, but supply for several years in the future.
The growing season in Florida
lasts from January through mid June or July, with a break in late
February and early March. During the growing season a hard frost would
kill orange trees, severely reducing yields for years in the future, and
damage the pack, or sugary meat of the orange, so that the damaged fruit
is unsuitable for squeezing. Hard frosts are probably the most bullish
event that can happen to the Orange crop because the damage takes
roughly five years to be undone.
As we enter into the Florida
growing season, the market does not appear to be placing any type of
risk premium into prices, despite the risk of frost. Currently Orange
Juice prices are trading at their lowest levels in over 20 years!
Technically, the trend in OJ is
still bearish. Resistance is centered around 69.90 basis the May futures
– with two hard hits recently at this level. But, at these prices it is
hard not to be bullish, especially with lines of resistance
To play this counter trend
movement, we are recommending a somewhat convoluted options play which
has limited risk and limited reward, but a very good risk to reward
profile:
- Buy a May 70 Call for 3.60
- Buy a May 70 Put for 4.20
- Sell a May 65 Put for 2.05
- Sell a May 80 Call for 1.15
This lopsided “butterfly” is
profitable if OJ prices go below 65.40, as the position is set-up for a
credit of +0.60 before commissions and fees ($90.00). Thus, in reality –
as we can not avoid commissions – we can basically expect that if OJ
prices crash, we will be out nothing, as commissions and fees would
probably eat up the initial credit on the position.
To the upside, this position is
profitable above 74.60 before commissions and fees. Above 80, this
position will max out on profit potential, with a maximum profit
potential of 5.40 (or $810.00 before commissions and fees).
The maximum risk on this
position is –4.60 or -$690.00 before commissions and fees, assuming OJ
settles right at 70 on options expiration.
|
May 2004 |
Open |
High |
Low |
Last |
Value |
|
Exp: 04/16/04 Days
to Exp: 91 Futures: OJK04 69.40 |
|
60.00C |
9.90
|
9.90 |
9.90 |
9.90s |
1485.00 |
| 60.00P |
0.55 |
0.55 |
0.55 |
0.55s |
82.50 |
|
65.00C |
6.25
|
6.25 |
6.25 |
6.25s |
937.50 |
| 65.00P |
2.00 |
2.15 |
2.00 |
2.05s |
307.50 |
|
70.00C |
3.60 |
3.65 |
3.55 |
3.60s |
540.00 |
| 70.00P |
4.40 |
4.40 |
4.20 |
4.20s |
630.00 |
|
75.00C |
2.25
|
2.25 |
2.10 |
2.10s |
315.00 |
| 75.00P |
7.60 |
7.60 |
7.60 |
7.60s |
1140.00 |
|
80.00C |
1.20
|
1.25 |
1.15 |
1.15s |
172.50 |
| 80.00P |
11.65 |
11.65 |
11.65 |
11.65s |
1747.50 |
|
85.00C |
0.80
|
0.85 |
0.80 |
0.80s |
120.00 |
| 85.00P |
16.30 |
16.30 |
16.30 |
16.30s |
2445.00 |
|
90.00C |
0.50
|
0.50 |
0.50 |
0.50s |
75.00 |
| 90.00P |
20.95 |
20.95 |
20.95 |
20.95s |
3142.50 |
Given the current resistance and
low prices, an upside break-out looks more likely, hence this strategy
is more aggressive to the upside. But, then again, OJ looked cheap last
week, last month, as well as several months ago. Thusly, this strategy
has very little downside risk. The real risk, which can never be
avoided, is sideways prices… a factor we are willing to bet against.
