For the holiday-shortened week ending September 8, Dec’17 cotton futures on the ICE initially rallied up the three cent limit before trading in a new sideways range between 74.00 and 75.50 cents per pound, in above average volume.   The week¢s price strength were attributable to Chinese policy/prices as well as additional U.S. hurricane jitters.  A strong weekly increase in hedge fund speculative buying was the evident fuel for at least some of Tuesday¢s rally, also evidenced by the pattern of high volume and rising open interest.  Other fundamental news this week included mediocre export sales and shipments (the latter being probably hampered by hurricane damage on the Texas coast).  Dec¢17 ICE cotton futures settled the week at 74.59 cents per pound on Friday, up 2.71 cents from the previous weekly settlement. This level represents an inversion over Dec¢18 cotton which widened to from 1.58 to 3.59 cents per pound, week-over-week.  In-the-money 73 call options on Dec¢17 ICE futures cost 3.96 cents per pound on Friday (up from 2.17 cents per pound the previous Friday);  an out-of-the-money 79 call on Dec¢17 cost 1.62 cents per pound.  Near-the-money 73 put options on Dec¢17 cost 2.37 cents per pound, while a higher 75 put was 3.38 cents per pound.  Out-of-the-money 66 and 67 strike Dec. puts cost 0.46 and 0.60 cents per pound, respectively, on Friday.

Growers should be poised and ready to take advantage of unexpected rallies, and protect themselves from sudden sell-offs. Forward contracting and/or various options strategies can be used to limit downside risk while retaining upside potential.  Physical bales that have been forward contracted could also be  combined with call options on Dec¢17 ICE cotton.  For example, while an in-of-the-money 73 cent Dec¢17 call costs 3.96 cents per pound (circa September 8), a 73:79 Dec call spread would cost a little cheaper at 2.34 cents.   A still relevant strategy (for only the next month) for unsold/uncommitted 2017 bales is buying put spreads on Dec¢17 futures.