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Tuesday’s Top Commodity Trades for 2020

Go KC!  

No, not the Kansas City Chiefs (who are #1 in the West) but /KC Coffee Futures, which are number one for our readers with a big $15,000 per contract gain at $142 - up from our September 25th entry at $100.  The lowest we dipped was $95.80, back in mid-October (/KCH20 is +$3 to the front-month chart) – staying just above our $95 stop line for the whole run and finally blasting off this month, well past our $122 goal.  At the time, I said in the Morning Report:

There's no ETF for Orange Juice but there is for Coffee (/KC) and we always love it below $100 and /KCH20 (March) is down to $102 and that makes for a fun play but you have to be willing to Double Down at $98 to average 2x at $100 with a stop at $95, which would be a loss of $375 per $1 or $1,875 per contract. So the risk is $3,750 but the reward, even at just $122 would be $7,500 on a single contract and /KC has been very good to us for two years now.

So, if the instructions were followed correctly, that's at least 2 contracts that are up $42 each for over $30,000 in gains in 3 months against a $3,750 risk – not bad for a quick commodity trade, right?  For those who are future-challenged, we also had a trade idea for the Coffee ETF (JO) as follows:

Coffee does have an ETF (JO) and, like SOYB above, we can pick up a spread that can give us a nice return. We think $100 (though it can dip below) is a good floor for Coffee as it's a point below which the farmers simply can't make money selling it. For the ETF, which is at $32.50, we can do the following spread:

  • Sell 5 JO March $30 puts for $1.40 ($800)
  • Buy 10 JO March $30 calls for $4.40 ($4,400)
  • Sell 10 JO March $32 calls for $3.20 ($3,200)

That's net $400 on the $2,000 spread so $1,600 (400%) upside potential if JO holds $32 into March. As long as /KC stays above $98, you should get paid in full. The downside to this trade is that, below $30, you would be forced to buy 500 shares of JO at $30 ($15,000) but we like that price and you can turn right around and sell calls against it to lower the basis further.

Clearly we can expect the full $2,000 to be paid out in March, as planned, and already the $30/32 bull call spread is $14.75/12.83 for net $1.92 ($1,920) out of a possible $2,000 and the short March $30 puts are down to 0.08 ($40) so net $1,880 can be taken off the table now with a $1,480 (370%) profit 3 months early – so why not?

We don't publish commodity trades often in our Morning Report as they are generally very risky, so we like to have a very strong premise before making a call.  The Sept 25th Report was following up on our May 10th call to go long on Soybeans, getting into the September Futures (/ZSU19) at $825 and they finished at $919, up $94 per contract and Soybean Contracts pay $50 per $1 move so +$94 translated into gains of $4,700 for each /ZSU19 contract while our option play on the Soybean ETF (SOYB) was:

As to SOYB, it hasn't been this low since, well, ever – as the contract began in 2012 at $25 and never really went below $17.50 until the trade war began so $14.50 is quite a bargain and, although it an be tough betting on Trump here, it's POSSIBLE we get a trade deal and that will hurt our hedges in the Short-Term Portfolio so, in order to hedge the hedges, a bullish bet on SOYB makes sense. For the STP, we can:

 
  • Buy 50 Nov $14 calls for $1.10 ($5,500)
  • Sell 50 Nov $15 puts for 0.95 ($4,750)

That's net $750 and, if SOYB goes back to $16 on a trade deal, those options will be worth $1.50 each for $7,500 on 50 100-unit contracts, which would be a 900% gain of $6,750 – not bad for an offset and our worst case is owning SOYB at 7-year lows and we can then sell calls to reduce our net $15.15 entry.

As you can see, we hit our $16 goal on the button in October and the short puts did indeed expire worthless so net $10,000 (not $7,500) on the trade was a gain of $9,250 (1,233%) on that trade as well – you can see why we like to play with Futures Contracts to pass the time away…  We are done with Cofee and Soybeans now but Orange Juice is still in play and the September /0JU20 (not /OGU20) contracts we liked back on 9/25 at $114 are down to $109 and, at $150 per contract, that's a loss of $750 each so far – not our best pick.

Overall, we still think this is bottoming action and, unfortunately, OJ does not have an ETF to play so we have to stick with the Futures play and hope for a poor crop report to bring those Large Traders back to the bullish side.  Things do generally bottom out for /OJ in Q1 and our contract is good to September.  What's holding prices down now is Brazil's Real, trading at just 0.25 to the Dollar is making a large portion of the import crop dirt cheap – so cheap that the Government is talking reform to fix it (they've already intervened to stop the slide) - which would be great for our /OJ futures.    

Between that and potential Chinese demand – we may actually have a trading premise here.  Unfortunately, you never know with commodities so keep in mind that each $1 move made on Orange Juice translates into +/- $150 for each contract you play and, as you can see from this year's April collapse – that can be $5 ($750) in a single day very easily.  Of course, we can gain that much as well – which is why we like to call the bottoms – not the middles.

I am not a big fan of shorting commodities as it's easier to pick value and be patient but Palladium has been off to the races for several reason (less Diesel Car sales after the scandal, EVs not catching on as fast as people thought but Hybrids use palladium too), most importanly mine shutdowns in South Aftrica causing supply to dry up recently.   That SEEMS to be getting under control and the move in Palladium from $900 an ounce last year to just under $2,000 this year is very likely overdone.


Palladium does have an ETF (PALL) but it has no options so you just have to short it – now $185.79 with a stop above $200 or if Palladium itself tops $2,000 but I think we should get a rejection around here – back to $1,900 ($175) for a 5% gain though that's not very exciting so we should look for something with more oomph to play, right?

Though the winter is expected to be mild, Natural Gas (/NG) is way down at $2.32 but, just yesterday, Kinder Morgan's Elba Island Terminal sent out its first container of LNG (Liquefied Natural Gas) and piplines were delivering 8.24 Bcf/day according to NGI's LNG Export Tracker – which is a very significant increase (about 10%) in export demand from that one terminal alone!

“The emergence of this seemingly inelastic demand with a baseload-like pull on domestic gas supplies marks an underlying shift in the U.S. gas market that, along with the rising baseload demand from power generation, will make national benchmark Henry Hub prices more prone to spikes,” RBN consultant Katharine Fraser wrote in a recent blog post.

I'm inclined to agree with her so the way we want to play /NG contracts is to generally just keep ourselves in the game – so we can be there to take advantage of a nice spike when it comes along.  That means scaling in AND out of positions – taking advantage of dips to add more contracts and spikes to lighen back up – constantly lowering our basis.  At the moment, the October Contracts (/NGV20) at $2.335 take us into the start of hurricane season and we don't expect to have them that long but the front-month January Contracts (/NGF20) are $2.325 – so I'd rather pay the extra penny for the extra 9 months.

Natural Gas does have an ETF (UNG) and we can play that conservatively with the following Options Spread:

  • Buy 40 UNG 2021 $15 calls for $4.20 ($16,800) 
  • Sell 40 UNG 2021 $19 calls for $2.70 ($10,800) 
  • Sell 20 UNG 2021 $17 puts for $2.20 ($4,400) 

That's net $1.50 ($1,600) on the $16,000 spread so $14,400 (900%) upside potential on that one and, if UNG does not hold $17, we are forced to buy 2,000 contracts at $17 ($34,000) – so keep that in mind as you might want to just be happy with the $6,000 spread that can make up to $10,000 (166%) without the short puts and only sell them (for a better price) if UNG goes the wrong way and you need to money to roll the longs to a lower strike (more on that if it becomes necessary).  

That UNG play should be considered the first of our "Secret Santa's Inflation Hedges", which I usually roll out on Christmas Eve but this year I'll be in Thailand for Christmas – so I'm going to put out our 4 inflation hedges between now and next Tuesday morning.  

 


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  1. Fair warning, I added some lines this morning!


  2. Good Twitter thread from  Tom Nichols:


  3. Homebuilder confidence looking a bit toppy now:


  4. The EU seemed to have done a good job of making an example of the UK and Brexit:

    https://www.wsj.com/articles/u-k-s-tortuous-eu-exit-is-a-lesson-to-blocs-members-dont-try-this-at-home-11576418401

    European voters have viewed the process so negatively that even EU-skeptic parties have mostly dropped talk of leaving the bloc or the euro



  5. Good Morning!


  6. Good morning! 

    New lines/StJ – Must be time to short then….  cheeky

    Brexit/StJ – Well if the UK ends up coming out of it OK though, others will likely head for the exits – that's the real danger.  

    Good point on that county chart, money gets more and more concentrated all the time.


  7. I and Jill

    Putting on 1/2 positions in I at $6.05 and Jill at $.94.

    https://finance.yahoo.com/news/intelsat-battered-investors-defy-risk-173549822.html

     

    Both very speculative, but am looking for some January Effect bounces on both.


  8. Counties/Phil – well, people get concentrated, anyway – that map needs a denominator of some sort.





  9. Laughing Through the Trump Era



  10. TCNNF down 17% on fraud allegations!


  11. Phil – I'm looking into dividend stocks for a buy/write and am considering WMB for a natural gas related play. Would you please tell me your thoughts on the company? I'm thinking buying the stock for $23.15 and selling a $25 call in Jan 2021 for $1.35 and selling a $20 put Jan 2021 for $1.60. dividend is $.38 quarterly.



  12. GEO/Advill – That ICE business is a strong growth segment.  cool

    TCNNF/Jeddah – Well the husband of the CEO was up to some nonsense but I understood it didn't directly touch the company.  This is a little different though as Grizzly is accusing them of other things (the FBI thing is about the husband):

    "Why we believe [Trulieve Cannabis] is a fraud," goes the title of a new report from Grizzly Research.

    Among the items: Due diligence suggests most of the company's cultivation space comes from hoop houses producing low-quality output prone to infestation and weather damage; ties between the company and FBI probes into corruption in North Florida; the company's initial license approval "stinks of corruption."

    Obviously (and allegedly) Kim got her license through her husband's corrupt connections and of course he wanted her to get a license and have a business so he could be the contractor building all these locations – so fruit of a poisoned tree sort of thing but the company itself (not sure about the greenhouse allegation) does great business and is actually making good money – so I think this is a bit of a hit job by the shorts who got burned in the recent run-up and are desperate to get some back before the year ends. 

    Grizzly only seems to have 2 reports to their name yet somehow they are splashing all over the place as if they are some kind of major authority.   Still, doesn't make it the safest-looking investment at the moment – if FL, for some reason, decides to pull their license – game over.  If this were CA, they would have been shut down pending the investigation.  

    WMB/Willsons – They are solid mid-stream players but a bit to much shale for my liking and $23.20 is $28Bn, which is a bit much considering how erratic their earnings are:

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Total Revenue
    $m

    6,860 7,637 7,360 7,499 8,031 8,686 8,298 8,209 8,514 4.83%
    Operating Profit
    $m

    1,375 1,569 -1,133 259 927 736 835     -11.7%
    Net Profit
    $m

    430 2,114 -571 -424 2,174 -155 155 1,345 1,447  
    EPS Reported
    $

    0.642 2.92 -0.762 -0.565 0.292 -0.160 0.125      
    EPS Normalised
    $

    0.644 2.92 1.37 0.563 0.941 0.581 0.917 0.963 1.05 -2.05%
    EPS Growth
    %

    -44.2 +352 -53.0 -58.9 +67.0 -38.2 +17.5 +65.7 +9.45  
    PE Ratio
    x

              39.3 24.9 23.7 21.7  
    PEG
     

              0.598 0.379 2.51 6.01  
     

    If nothing every goes wrong again then sure, it's supportable but the company doesn't usually have 2 good years in a row – and I'm not sure why this time is going to be different.   Here's what they say:

    OK, so I'm convinced my UNG play was a good idea!  

    That's where they are based – good. 

    They are even servicing Elba Island (see above post):

    And again, I'm very excited by the growing demand for LNG:

    Projections look solid but still – 20x at this price.

    They were at $14 two years ago and $20 last Dec and now $23 – the Dividend is ($1.52) 6.69% so it would be nice to own them at $15, right?  That means, I'd be most likely to sell the 2020 $18 puts for $2.20 to net in for $15.80 and worst case is you get a bit less than the dividend without having to own the stock (and you get it right now) or you get to own the stock for $15.80 and then you can sell $15 puts for $2 and $15 calls for $2 to drop your net down to $11/13.40 on 2x.  If you aren't THRILLED with the idea of owning 2x WMB at $13.40 (42% off current price) – why would you sell 1x the puts now?  


  13. Mortgage REITS are breaking higher today. i.e., NLY, AGNC, etc.

    MRRL (2x Mortgage REIT ETN)  up nicely.  Next dividend should be paid mid-January.  Expect $.50 or higher.  Stock still yields almost 20%.. 


  14. Thanks for the analysis. I am not seeing them as low as $14 two years ago. I show them at $20.36 per share as a low. 


  15. I feel like I'm forgetting to do something, so remind me if I am.

    I'm going to put up the Reviews for Money Talk, Hemp Boca and Dividends – since we're not touching any of those (MTP we can't, Hemp Boca I want to wait 'till we get back from Thailand and Dividends I want to just leave alone now that it's full).  

    Money Talk Portfolio Review:  Only up 3% at the moment but it's only been a month and we only have 3 positions that we can't touch – so I guess it's going well but, yawn… 

    • SPWR – They are spinning off a division or I would have gone for the bull call spread too.  I love these guys long-term and we can just sit on the short puts without worrying about the mess from the splits.  I expect to collect the full $2,935 on this one.

    • GOLD – Our Trade of the Year so it better pay off!   Was only net $1,665 at the last review and now $2,947, so up an additional $1,282 (77%) in a month was a nice trade, even if you were late.  I fully expect to collect the remaining $9,053 (307%) - so still good for a new trade but nothing like our original entry anymore.  

    • IBM – Last year's Trade of the Year is a resurrection play – as we've already cashed in the originals at $150.  $135 got attractive again so we're back in with a $16,000 spread that's currently net $60, up $140 from our $80 credit so far.  Still great for a new trade with a $16,940 (28,233%) upside potential over just $140!  I 

    Only a month old and up $2,958 is on a good track and the potential for our trades is another $28,928 PLUS that $2,958 is $31,886 should be enough money to beat the S&P over the next two years so no worries.   We're only using $8,000 in margin and none of our Cash (we have more than we started with) so PLENTY of room for expansion.  

    My next show is likely in Jan but not set yet. 

     


  16. Oops, I take it back, I realized it was only 3 so I did redo the math and changed the comments a bit.

    MREITs/Albo – Things should be nice and steady next year – as long as Trump doesn't do anything crazy….

    WMB/Willsons – OK, 3 years ago…  I think I was thinking 2 years before they were at $20.


  17. Phil/BA

    Thanks for your thoughts yesterday.

    How about a short play? I don’t think they get anything done in the next 4-6 weeks in terms of FAA approval  .

    So, if anything, the pressure is to the downside till at least latter part of Jan.

    A put spread expiring Jan 24?


  18. Phil/Xmas 

    How about a short term idea to defray the costs of buying Xmas gifts for friends and coworkers?

    (Trying to generate some excitement on the board)


  19. BA/Maya – I need to read more on where they are given production halt.   Huge danger they resolves something and fly up on you overnight – not a risk I would take – especially considering $300 is still my long-term buy mark for BA.  

    XMas/Maya – Thanks for trying but these last two weeks of the year are a time for caution.  Very thin trading and lots of international cross-winds still out there.  Good time to give the gift of CASH!!! and take a few days off from the market – maybe a trip to Thailand?  

    Speaking of which, time to take my trip to the Hemp Boca Show (2:30)  – I will try to catch up later this evening.  


  20. AVGO, which has had an incredible run in the past 10 years, still remains a core tech holding, IMHO.

     (AVGO is up 1800% in the past decade vs. the SOX up 425% and S&P up 185%).

    Not only that but someone who bought the stock back then is now getting almost a

    30% yield from the dividend, as the dividend has been increased by large amounts each year.  Most unusual for a tech stock.


  21. AVGO / Albo – These guys have executed well for sure. Well, and acquisitions as well.


  22. STJ – I've been putting on BCSs and selling way out of the money puts for the last two years.  Has worked well so far.


  23. Getting played:

    https://www.bloomberg.com/news/articles/2019-12-17/china-may-buy-ethanol-divert-hong-kong-trade-to-hit-u-s-pledge

    China is considering re-routing trade that currently passes through Hong Kong to mainland ports, the people said. That could enable around $10 billion a year in goods transshipped there from the U.S. to be directly booked in the mainland, boosting the tally. The U.S. does not count shipments that go through Hong Kong as part of its trade with China.


  24. Phil / GEO

    If the company is fine it looks like a good option for Yodi´s cherries calls own the stock, enjoys the 14% dividend and  6 months options while you wait


  25. ALBO  / REITS

    Any thoughts on a new play in this space?  I'm very new to real estate in general

    thanks!


  26. REIT / Potter – Just read that Soros (who has a decent track record) has been investing heavily in NLY. I like them too and they have been on Phil's REIT list for as long as I remember.


  27. Hi Advill GEO played the stock since April 2018 not counting div show a loss of 760.00 Not the best of horses. Stick with WMB, IBM MO etc


  28. P.S. Div. on GEO from April 1.152.00 So nothing to write home about.






  29. Too hot for humans? First Nations people fear becoming Australia’s first climate refugees



  30. Choke Points