– Cotton prices had yet another volatile week with H23 trading in a wide 973 point range between 77.50 and 87.23 before closing up 302 points at 83.20. Futures volume was virtually the same as the previous week, averaging 25,961 futures with options at 4,410 daily! There remains a distinct skew (they are more expensive) to “out of the money” calls than puts!
– This season beginning 1st June 2022 when Z22 became the front month (on account of holding the highest open interest), Cotton has seen an average daily move of 386 points or nearly 5%! The average of the 21/22 season was 287 points daily (nearly 4%) against the previous 5 year average of 148 points or circa 2% leading to the obvious question of whether high price volatility is here to stay?
– As always we like to revert to history and statistics as to clues of what happens next. In short, noting the market has been confined to a 70.10 to 90.52 low to high range since the end of September, we are fairly sure that the intraday volatility is about to calm down a lot, noting that history shows that prices ALWAYS eventually revert back to their mean!
– Included below is the open interest in the January nearby options that are actively traded against the H23 contract. There are just 12 days to go until their expiry and remain extremely expensive noting that one could receive 521 (251 plus 271) points for the CTF23 straddle (selling the 83 call and put simultaneously). After costs and spreads, this means one would have to see H23 close below 78c or above 88c to lose money. We would add this is not any recommendation to deal but merely to point out how expensive price protection is at the present time!