Michael: Hello everyone and welcome to your June edition of the Option Seller Podcast. This is Michael Gross of OptionSellers.com. I’m here with head trader James Cordier. James, a lot of talk this month about bull market in commodities. It’s been getting a lot of media attention, obviously crude oil has been leading the charge, but what are your thoughts on that? Are we in a bull market right now or is it just speculation?

James: You know, most often, Michael, at the 3rd and 4th and 5th year of an expansion economically is usually when prices of commodities start going up. There’s usually a glut of commodities during a recession. As years go by, a lot of the excess commodities are then purchased and consumed, and usually that is when you start normally getting higher prices. I do believe we’re in a bull market in commodities. It is lead by energies, which of course was pretty much facilitated through OPEC cuts in production, but let’s face it, practically everything comes from a barrel of oil. Whether it’s cotton or soybeans or coffee or what have you, everything derives off of a barrel of oil or a gallon of gasoline. Of course, energy prices have really risen quite a bit over the last 18 months. That leads us to believe we are in a bull market in many commodities. There are 1 or 2 that have certainly oversupply in them, but the commodity market has been in a nice uptrend. Usually, this does happen 3 or 4 years after the beginning of an expansion and its kind of textbook so far.

Michael: So, we have oil markets possibly leading the charge here. Some of the grains have been aided by some weather issues. Do you see this spreading to all commodities or is it primarily limited to a few sectors?

James: I think it’s limited to a few sectors. If you look at the price of sugar or coffee, we’ve got just massive production expected in South America this year. The coffee market recently hit a 12 month low, the sugar market recently hit a 12 month low, so it is really a market that needs to be picked, if you will, to be in a bull market. A lot of commodities do have up trends, but some of the major commodities that we follow are over supplied. I think that’s why we really enjoy doing what we do best, and that is analyzing fundamentals on the different markets, simply buying a basket of commodities or selling a basket of commodities. I think you can be more sophisticated than that, and that’s what we try and do here, of course.

Michael: Yeah, in the media they like to get a story line, “Bull Market in Commodities” and that’s what they tag and they really maybe only focusing, as you said, on a few markets, some of the other markets. That’s why you get that play within the commodities where they’re not really as correlated to each other as maybe stocks.

James: Certainly not. That’s where diversification comes in. If you’re long or short the stock market, basically you’re living or dying by if it goes up or down. Of course, in commodities, we follow 4 different sectors about 10 different specific commodities and they really do have their own individual fundamentals, and that’s what makes following the same commodities for so long very prosperous, because you do get to know them. They all do have personalities. You don’t simply buy a basket of commodities like you do stocks. It’s different than that.

Michael: So, the person watching at home now and they’re saying “boy, it’s a bull market in commodities. This must be a good time to sell options”… that’s really kind of irrelevant if you’re an option seller, isn’t it?

James: You know, the interesting commodities, I think, is what bodes well for us. Whether you’re selling options on your own or you’re doing it with ourselves, it does increase premiums of options on both puts and calls. Certainly, the interest by the speculator, whether it’s a bank in London or whether it’s a hedge fund somewhere in San Francisco, it does increase the value of the options. If you are picking up bull or bear market, it allows you to get in at very good levels, sometimes 40-50% out-of-the-money depending on which market it is.

Michael: So now matter which side of the market it’s on, the media coverage of prices going up brings in a lot of public speculators and that drives premium.

James: Whether you’re selling options on your own or you’re doing it with us, it really plays into your hands… it really does.

Michael: Great. We’re going to take a look at a couple of these markets that’ve moving pretty good to the upside or we feel we have some pretty good opportunities to look at this month. Why don’t we go to the trading room and get started?

Michael: Welcome back to the market segment of this month’s podcast. We’re here in the trading room with head trader James Cordier. The title of this month’s podcast is taking advantage of the bull market in commodities, and we’re going to feature a couple of markets this month that are leaders, what’s driving the bull market in commodities, but how to take advantage of it might not be exactly how you think it would be. A lot of people might think, “Oh, well I’ll just go out and buy a commodities index fund or maybe I’ll buy some individual commodities stocks or what have you”, and the problem with that is, one, as James mentioned earlier, sometimes these commodities aren’t all going to move together. So, you may buy one commodity and it’s not going to participate in that bull market like other stocks wood. Also, we don’t know when this bull market might end, so we want to position ourselves so, yes, we can keep taking advantage of this if the bull market continues, but also if it stops tomorrow we still want to be able to make money. So, we’re not going to position how just a common traditional investor might try and position. We’re going to talk about selling options here. Let’s go to the first market for this month… the cotton market has been one of the leaders of the commodities bull here. Obviously we’ve had a pretty sharp rally here since last October, James. We’re up almost 25% in prices through this week. What’s going on here as far as prices go?

James: Cotton’s another example of one of the bull markets of 2018. We do have some more demand out of Asia than we thought. They were speculators that thought that supplies in China were slightly less than what early was previously expected. Cotton production in China is supposed to be down slightly because of some weather. Of course, the big news is we had just an incredible drought to start out the planting season here in west Texas. Basically, commodities like soybeans and cotton, everyone’s so concerned about the weather and when they talk about dry conditions or there’s drought going on, speculators come and bid up the market. A lot of the end users then need to get insurance and they’ll buy futures contracts for cotton, as well, and that really boosts up the price usually right as growing season is beginning. That’s what we’re here looking at again today for the cotton market in 2018.

Michael: Okay. So, that drought has been pushing up prices, but here in the last couple of weeks, that started to lessen a little bit. We’re looking at a map here of Texas, west Texas, big cotton growing region. If you would’ve looked at this map, the darker colors indicate a severe drought portion, so we still have some going up in northern part of Texas, but if you would’ve looked at this chart 3-4 weeks ago, almost half of Texas was in that red. So, this has mitigated quite a bit to where we are right now and that has allowed a lot of these planters to really make some progress in planting over the last couple of weeks. As a matter of fact, stats we just pulled today, James, at the end of the week of May 13th they were 28% planted. At the end of the week of May 20th, Texas farmers were 43% planted, so that’s a lot of progress to make up in a week and that’s due to that they finally got some moisture. They were able to get the crop in the ground. 5-year average is only 33%, so they’re actually ahead, quite a bit ahead, of where they normally are in a 5-year average, so that moisture they did get has really done a lot of good for the Texas crop. USDA just came out with their most recent/first estimate for the ’18-’19 crop. You’ll see here, James, ending stocks actually above last year is what they’re targeting.

James: Really a weather market right now. Anyone who lives in the United States, especially in the eastern half of the United States, I know we have clients and viewers from all over the world, but here in the U.S. it’s raining all the time. Precipitation is just dominating the weather market right now and, in the chart you just mentioned, for the Texas state, that was truly an extremely dry condition and that has mitigated quite a bit. We’re now 5-6% above the 5-year average for plantings. We now have precipitation coming in. We’re going to wind up having a larger crop than a lot of people thought about and then we’re going to have carry-over in the United States, the highest level in 10 years. I know a lot of people are going to look at this, “well, the carry-over was much higher 8-9 years ago”, but cotton was also around $0.40-$0.50 a pound then, too. That’s a big difference.

Michael: One other thing we should probably bring up that’s really carrying a lot of weight here is that cotton also has a very strong seasonal tendency. Actually, it doesn’t even really start to break until about mid-June. What’s usually behind this? What causes this?

James: Just as we were describing, Michael, if there’s any type of weather fears in Alabama, Mississippi, this year it was Texas, generally speaking, until the crop is planting and until the weather conditions look favorable for production that year, generally speaking that’s going to be the high point of the year as planting’s taking place in th