Cocoa futures hit a new multiyear high back on July 3rd, and we’ve been waiting on a 123 top formation to short Cocoa futures (see previous post: Cocoa Hits Multiyear High). We just bought a Sept. 2014 Cocoa Put option with a 300 strike price for $290. As you can see in Daily Cocoa futures chart below, prices closed just below the #2 point of 3085 yesterday, and today they continued edging lower closing out the day at 3055.
The 50% Retracement on the Daily chart (see below) is at 300.5, so our 300 strike price put option will be at the money if prices drop another 50 points. HOWEVER, the 50% Retracement on the Weekly Cocoa futures chart (see below) is 2598, meaning this trade for such small risk ($290) could net us huge gains!
This will be the 3rd time we’ve shorted Cocoa futures with an option, but the previous 2 times our options expired worthless and out of the money. Prices have to drop eventually, so 3rd time is the charm!