Cocoa is a great hot drink which most of us enjoy when the weather is cold. Sitting by the fireplace just dazing into the flames, sipping on a nice hot cocoa drink while lost in thoughts of better days to come.
Seasonal tendencies tend to impact prices of commodities and as such with the nicer weather about to come our way as we approach spring and summer we can expect that cocoa prices should somewhat drop.
How can we take advantage of a possible price drop in cocoa?
- We can become short sellers of the actual cocoa futures contract however that would require a margin of $1375 per contract, but it would also expose us to unlimited risk.
- Without overextending ourselves with risk, we can use options to speculate on a downward price movement on cocoa through the futures markets.
Which option increases in value as prices drop? A put option.
So let’s put together some put options strategies that we can use to participate on cocoa futures.
First let’s take a look at a chart.
As you can see there are supporting technical analysis reasons why cocoa has a high probability of a price drop.
Look at MACD which is crossing over downwards showing weakness, and there is divergence as well.
Now what would we expect to happen, how far down would we be happy?
Let’s look at support levels, which from the chart we can see there are support levels at 2900, 2850, 2750 and 2650.
As for options strategies, what could we use to participate?
- just buy a put option
- create a bear put spread
Of course there are other choices, but these seem to be quite effective when trading options on commodities.
Remember when using options on commodities expiry dates are different, the multiplier is also different for each commodity, finally the strategies above each have different risks and different rewards.
There are many technical signals that can help with the decision making process and just as many ways to manage risk and protect profits.
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