JO - Trade the Softs Through ETFs & Options
The softs sector offers opportunities through ETFs and Options, writes Paul Cretien.
Soft futures, including cotton, sugar, coffee, cocoa and lumber, provide some of the strongest trends in the futures markets. They tend to be less liquid than financial futures and even the grain markets. However, they also can be traded through exchange traded funds (ETFs) and exchange traded notes (ETNs). The ETFs and ETNs typically are priced to reflect near term futures price movements. Traders can also trade options on these five soft futures along with orange juice, though there is no ETF for frozen concentrated orange juice.
Price changes, as defined by percentage changes from March 25, 2018 to this week, are shown for the iPath Series B Bloomberg Cotton Subindex Total Return ETN (BAL), iPath Series B Bloomberg Sugar Subindex Total Return ETN (SGG), iShares Global Timber & Forestry ETF (WOOD) and the iPath Bloomberg Cocoa Subindex Total Return ETN (NIB) on the chart below. Coffee— is not included here because it does have strong price trends that would distort the chart if it were included.
Although without trends, “Trendless but Volatile” presents potentially profitable trades because of many successive positive and negative price changes. The price changes are contained in a horizontal channel between plus 4% and minus 4% from the beginning price on March 25, 2018. During the year there were multiple opportunities for a profit of approximately 8% of the beginning price for the more volatile asset, cocoa, and to a lesser extent for sugar. Traders could have seen success initiating a series of range bound trades. While softs typically present strong trending opportunities, a trader following these markets could have had success within these ranges and breakout trades would not have been initiated.
On the other hand, coffee has two extensive downward moves connected by a quick price increase in September and October 2018. The fact that the iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO), is currently 30% below the price in March 2018 as shown in the chart below suggests a trend trade could have been successful, either outright or utilizing options.
Calls expiring in July 2019 are analyzed for the six soft futures in the table below. The variances from predicted price curves computed by the LLP options pricing model for each soft futures are small, meaning that option price changes could be predicted based on forecasts of changes in the underlying futures.
Short-term options could be used to profit from the daily price changes (the 8% spread described above) for cocoa or sugar. The two soft futures price change charts, though very different, both contain ideas for profitable short-term trades.