For the week ending November 10, the most active, but maturing Dec’17 ICE cotton futures traded in another gyrating sideways pattern. A major influence on the market this week was continued fund rolling out of the nearby contract. Fundamental news this week included somewhat weaker export sales, but that still reflected export demand support above 66 cents. Dec’17 ICE cotton futures settled the week at 69.05 cents per pound, which is 35 points higher than where it settled the previous week. Dec’18 cotton futures settled Friday at 69.62 cents per pound. A sample of option prices on ICE cotton futures saw relatively small changes from the previous week. On Thursday November 9, an expiring in-the-money 73 put option on Dec’17 was worth 4.71 cents per pound. Out-of-the-money 73 call options on Jul’18 ICE futures were worth 2.51 cents per pound on Thursday; a further out-of-the-money 79 call on Jul’18 traded for 1.13 cents. Looking ahead to next year’s crop, a near-the-money 67 put option on Dec’18 cotton cost 3.25 cents per pound on Thursday, while an out-of-the-money 60 put on Dec’18 cost 1.04 cents. Chinese cotton futures trended lower this week, while world prices were more mixed.
With the post-Hurricane Harvey rally, we may have seen the last opportunity for ICE futures settling over 70 cents for a while. Remaining upside volatility might come from surprising production forecasts over the next several months. While the upside may be limited, there is a risk within six months to see futures under 60 cents. But since that is all uncertain, growers should remain poised and ready to take advantage of unexpected rallies, and protect themselves from sudden sell-offs. Forward contracting, immediate post-harvest contracting, and/or various options strategies can be used to limit downside risk while retaining upside potential. In particular, contracted bales could also be combined with call options on the deferred futures contracts. It is also not too early to be evaluating the worth of put spread strategies to hedge the 2018 crop (or, really, to hedge the insurance base price). Hedgers still with put or put spread positions on Dec’17 need an exit plan wince the remaining time value will erode exponentially in October.
Source: The Cotton Marketing Planner