We owned a March Sugar #11 Call option (see our post here: We Are Long Sugar When Prices Broke Above 16.48 Today) that expired worthless on 2/18/14 yesterday. Total loss: $268.80 plus broker commission. Then today, prices spiked above the #2 point of 16.58 in the wide 1-2-3 bottom formation (see Daily Sugar#11 chart below).
May Sugar #11 is currently at 16.49 at the time of this post.
We knew prices were going to move, but we missed it by what looks like a few days or so. We are going to re-enter the Sugar market with a May option which expires in April, giving us a couple months. We are very confident in prices heading higher towards the more conservative 50% Retracement level of 17.30 based on the most recent major move according to the Daily Sugar #11 chart – see below. Typically, a wide 1-2-3 formation means a stronger move when prices break through the #2 point as they did today. Therefore, we look to the Weekly Sugar chart (see below) to see where this more optimistic 50% Retracement level would be.
We purchased a 1675 May Call option for $828.80 which expires 4/15/14. That’s just 2 strike prices out of the money and we are willing to pay a premium to get into this market at the 16.75 level. Margin on a full contract is approx. $3000, so for a small move higher we will be in the money and will have only risked $828.80 (less than 1/3rd of the margin requirement). If prices move to the 50% Retracement level of 23.28 (see Weekly Sugar chart below), we can make a very nice ROI on this trade.
If we consider the last major move to be from the high of 36.08 (see left-most high reached on the week of 2/4/2011 on Weekly Sugar #11 chart below) that puts the 50% Retracement at 25.39. That would be our next target if prices continue past 23.28.
One strategy would be to simply exercise our option and go long a contract and put our stop-loss near our strike price of 16.75 (above to lock in some profits, or at or below 16.75 to limit our risk capital to a comfortable amount. We’ll have to see how prices move over the next couple months to see which strategy is most viable.