Cocoa's continued sideways movement may have some traders looking for strategies that will benefit from the current consolidation phase. One such strategy would be to sell a strangle in Cocoa futures options, with call strike prices above the recent highs and put strike prices below the recent lows. For example, with March Cocoa trading at 2822 as of this writing, one could sell a February Cocoa 3000 call as well as a February Cocoa 2600 put for about 70 points, or $700 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if March Cocoa is trading below 3000 or above 2600 at option expiration in early January.
Cocoa's fundamentals have been painting a mixed picture for traders recently, as concerns about potential political unrest following the elections in the Ivory Coast, which is the world's largest Cocoa producer, have offset larger supplies of Cocoa in the world market, as well as a resurgence in the U.S. Dollar. Since October of this year, the price of lead month March Cocoa has been stuck between 2700 on the down side and 3000 on the upside, with neither bulls nor bears willing to take control. The International Cocoa Organization (ICCO) increased its world Cocoa production estimate to 3.613 million tons, however they also raised world cocoa grindings by nearly 5% and still expect a global deficit of 82,000 metric tons. Many traders are also awaiting the results of the presidential election in the Ivory Coast which are expected to be released today. Continued concerns regarding the debt situation in Europe has sparked a rally in the U.S. Dollar, which is typically viewed as bearish for commodity prices. The most recent Commitment of Traders report confirms the sideways trend, with large non-commercial traders net-short only 134 contracts and non-reportable traders (small speculators) holding a net-long position of only 1,737 contracts as of November 23rd.
Looking at the daily chart for March Cocoa, we notice prices consolidating for the second time in the past several months, although this time well-off the highs made earlier this summer. Prices have been trading on both sides of the 20-day moving average, but below the 200-day moving average, which gives Cocoa bears the edge. The 14-day RSI is in neutral territory, with a current reading of 48.20. It would take a close above the recent high of 2973 for bulls to regain control, with bears looking for a move through support at 2729 to gain the upper hand.
Mike Zarembski , Senior Commodity Analyst