Cotton Selloff or Not? | MartinKronicle - Michael Martin
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Cotton Selloff or Not?

cotton.strip

(click for larger and clearer image)

Seems there was some selling pressure in cotton Friday. Anyone who was long may have seen extensive volatility hit their equity. Hopefully, you had a small position on or got stopped out before it hit bottom.

But all this talk about cotton at historical highs got me thinking that there is another way to trade cotton with decent upside, less volatility, lower drawdowns, and the ability to avoid limit moves.

december.may.cotton

(click for larger and clearer image)

The May-December cotton spread has trended nicely. It’s almost doubled since the beginning of the year. What happened to the spread on Friday during all the selling pressure? Nothing. If you look close to the above chart, you’ll see a small horizontal line. That’s the net difference in the spread based on Friday’s trading. Both May and December were off 7.00, so the spread was flat or unchanged.

I don’t trade spreads that involve the front month. Look out much further and you can hold these positions for weeks or months.

More on cotton spreads tomorrow.

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  • Jaytrader

    I really like the way you think, Michael! With the market volatility that’s been in place since ’07 it seems that using spreads has been the prudent way to trade. Although there’s still risk involved it’s more ‘dollar neutral’ so you have a better chance of surviving an extreme adverse move (like we’ll all see when the pits open tomorrow AM in metals and energy). Plus, the old crop/new crop cotton spread chart certainly looks ‘smoother’ than just the March or May cotton by itself.

  • Anonymous

    that’s the point.