Cotton Selloff or Not?

cotton.strip

(click for larger and clearer image)

Seems there was some selling pressure in cotton Friday. Anyone who was long may have seen extensive volatility hit their equity. Hopefully, you had a small position on or got stopped out before it hit bottom.

But all this talk about cotton at historical highs got me thinking that there is another way to trade cotton with decent upside, less volatility, lower drawdowns, and the ability to avoid limit moves.

december.may.cotton

(click for larger and clearer image)

The May-December cotton spread has trended nicely. It’s almost doubled since the beginning of the year. What happened to the spread on Friday during all the selling pressure? Nothing. If you look close to the above chart, you’ll see a small horizontal line. That’s the net difference in the spread based on Friday’s trading. Both May and December were off 7.00, so the spread was flat or unchanged.

I don’t trade spreads that involve the front month. Look out much further and you can hold these positions for weeks or months.

More on cotton spreads tomorrow.

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