The Commodities Market Investment U
Post on: 22 Апрель, 2015 No Comment
by Lee Lowell Wednesday, August 15, 2007 Natural Riches
by Lee Lowell. Stock and Commodity Option Specialist
Wednesday, August 15, 2007: Issue #701
I’ve been an active commodities trader for 16 years, both on the floor and off. And one of the reasons I like this market so much is that there are only 15 to 20 commodities that are truly worth trading.
When the number is that small, you really get to know the market’s behavior and seasonal tendencies. This allows you to become intimately familiar with each commodity, and that makes trading them much more profitable over time.
I’m always scanning these 15 to 20 commodities to see if any new trading opportunities exist. And at the moment, there are three I’m close to pulling the trigger on. But first, let’s look at how the commodities market works, and the best way individual investors can play it.
The Commodities Market is Pure Supply & Demand
The commodity markets tend to move in more predictable and smoother patterns over the long run, compared to stocks. That’s because they truly end up making their moves based on supply and demand
There are no firms and CEOs running the commodity markets. There are no quarterly earnings reports. And the Fed isn’t trying to intervene.
Many physical commodities are food-based in nature and tend to move according to growing patterns, seasonal tendencies and weather. We’re talking about corn, wheat, soybeans, coffee, sugar, cocoa, orange juice, crude oil, natural gas, etc. Prices are based on how well the crops are growing and how much supply of the product is currently in storage.
Although there are some government reports to contend with, they typically only give us a clue as to how the crop is progressing in the growing cycle. Even though you may read about a hedge fund or two trying to control a certain futures contract, the commodities market is so large and so deep, that the hedge fund may only have a very short-term effect.
With that said, if you’ve never traded commodities before, you may be wondering how you can get involved. It’s actually pretty easy
How To Buy and Sell Commodities
Commodity trading is actually just as easy as stock trading. The best way to get involved is through futures contracts and futures options contracts. Purchasing and selling these is the same as trading stocks or stock options.
Other than buying orange juice or coffee at the local grocery store, speculating on the future movement of physical commodities can be done by buying and selling futures and futures options contracts that trade on one of the designated commodities exchanges around the U.S.
The most notable futures exchanges are the New York Mercantile Exchange (NYMEX), the Chicago Board Of Trade (CBOT), the Chicago Mercantile Exchange (CME) and the New York Board Of Trade (NYBOT).
You can trade both futures contracts and futures options contracts at these exchanges. The only thing you would need to do is open a commodity trading account with a registered commodity broker. (See today’s Crib Sheet.) This is no different than opening a stock trading account.
Once your account is open, you can trade commodities the same way that you trade stocks. Do your research, look at the charts, check the fundamentals, and then enter the trade. For me, the only way to play commodities is through the use of options contracts, for a couple of reasons
Now let’s take a look at three potential plays I’m keeping my eye on right now
Three Ways to Play the Current Commodities Market
1. Natural Gas
The natural gas market has taken a big beating to the downside over the last two months. My sources in the option pits tell me there might have been another troubled hedge fund that was liquidating futures contracts that led to the big decline.
The other reason is that the large amount of natural gas supplies in storage has been weighing on the market. But, as we have learned over the last few summers, we’re about to hit the major portion of hurricane season, and not too many people want to get caught short this market when hurricanes do decide to come our way.
The chart below shows that natural gas futures have most likely made a bottom and will probably trend higher from here, or at least not retrace much lower.
Here’s a chart of the December 2007 coffee futures:
Although a major portion of coffee is grown in South America and its winter season is winding down, we’re seeing a push here to the upside that may keep going. If it can stay above the resistance line that I’ve drawn for the next few days, it might be ripe for a bullish trade.
3. Orange Juice
Lastly, we have the orange juice market
Although orange juice is not known for its high volume or huge following, we do know that during hurricane season we can see major moves to the upside.
This is a highly speculative play, but if Florida gets whacked with a few hurricanes over the next two months, we could see the orange juice futures move to all-time new high levels. Considering the massive drop the orange juice market has endured since the spring, taking a limited-risk bullish option position could be the smart play.
Good investing,
Lee
Today’s Investment U Crib Sheet
Here are three commodities brokers you can use to get started. All of them know Lee, and are familiar with his strategies. We receive no compensation from these groups. This list is for your benefit only:
