An Orange Juice Strategy Ahead of Hurricane Season
Hurricane season starts June 1, and I think a speculative bullish options trade in ICE orange juice futures is a seasonal strategy worth considering.
Last week, the National Oceanic and Atmospheric Administration (NOAA) predicted we’d see nine major hurricanes in the Atlantic region. If Florida is hit, we could see damage to the orange crop, and it’s been tight in the past few years due to dry weather and past storms. Florida is expected to harvest 168.5 million boxes of oranges this season, up from 129 million last year. One box of orange juice weighs about 90 pounds. Last year’s crop was at 17-year low, causing prices to rise. If we get weather problems like drought, the oranges are smaller.
And throwing the threat of hurricanes into the mix, I think a good strategy would be to consider buying January 2009 calls or a call spread. Argentina, a key exporter, is having problems with its current crop too. Its citrus production is expected to decline 21 percent this year because of a July frost that damaged blossoming trees, according to the U.S. Agriculture Department.
The orange juice futures market has gotten oversold this year, coming off highs December 2007 near $1.50 a pound and at $2 on December 2006. We may not see those $2 back in view, but I am targeting somewhere in the middle of those highs, or $1.75 when the options I’m recommending expire.
I recommend buying the January 2009 $1.20 calls at 13 cents or better, for a cost of $1,950, not including commissions. Your breakeven would be $1.33 plus your transaction costs, and the target price is $1.75. These options expire December 19, 2008. The ICE product is a 15,000 lb contract, and one penny move is $150, or $7.50 for the minimum price fluctuation.
You can also consider the $1.20/$1.50 call spread, for about 6 cents, or $900 not including commissions. Your maximum profit would be $4,500 less $900 you paid and commissions. So it’s a good trade too, depending on your account size and risk tolerance. Feel free to call me to discuss these ideas further, or for ideas in other markets.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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