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June 26, 2007

From “The Greenrush Capital Report – June 23, 2007”

COMMENTARY

An extremely data heavy week is coming, and it appears from the action this week, that the stock market doesn’t want to have anything to do with it. Housing data on Monday and Tuesday, Durable Goods on Wednesday, GDP and the Fed Meeting on Thursday, and NAPM on Friday. Whoa. Should make for a very volatile week in the Financial markets. The S&P had its lowest weekly close since April 27th. 10 year yields consolidated and appear to have run out of upwards steam, at least for now, closing the week at 5.257%.  The US Dollar (DX #F) also suffered its first significant losing week in its last six, and it is approaching major support at 8198-8200.  Once again, be very prepared for a flurry of market swings over the next two weeks as traders position themselves ahead of the summer holidays. Sharp sell-offs in the grain markets late this week may continue early into next week, as weather forecasts have put some more rain in the forecast for the parched Eastern Corn Belt. Cattle on Feed numbers reported by the USDA appeared slightly bearish, with 11.272 million head of cattle on feed in the U.S. as of June 1st, up .8% from a year ago.

AUGUST RBOB UNLEADED GASOLINE (NRBQ7)
TRADE TO CONSIDER
Option Spread: Buy August RBOB 2.28 call, sell August RBOB 2.38 call for 315 pts or better ($1,323 / spread).
Desired Risk: Exit the spread at the close, the day AFTER a close below 2.19
Target: Futures targets are 2.36, followed by 2.43. Maximum profit is achieved in the spread on expiration at 2.38 or above. Total value of spread at expiration at 2.38 or higher is $4,200 / spread.  
Expiration Date: 7/26/2007 (33 days)
Why: Unleaded gasoline has slowly been creeping higher over the last 2 weeks, after reaching what many people thought was the ‘top’. The market scored what we think was a technical breakout on Friday, and we are looking to get long using a limited-risk, limited profit potential, option spread strategy. If the market expires at 2.38 or higher, our spreads will be worth the maximum 10 cents (from 2.28 to 2.38). That’s $4,200 per spread. If the market expires below 2.28, you will lose the full premium. If our analysis is correct, I think the breakout could accelerate quickly next week, and we may look to book profits, if possible, by early July. I think this is an excellent risk/reward, since we are looking to buy the spread only 3 cents from the money. The caveat is that we aren’t buying very much time, so I would cut my losses quickly, on any daily close below 2.19.

If you cannot view the RBOB Unleaded Gasoline Chart, go here.

SEPTEMBER BONDS OVER SEPTEMBER NOTES (USU7/TYU7)
TRADE TO CONSIDER
Futures Trade: Buy September Bonds, Sell September Notes, at 1’13 or better.
Desired Risk: Risk a daily close below 1’00 ($406.25 / spread)
Target: 1st target = 1’31 (move stops to breakeven); 2nd target = 2’13; 3rd target = 2’28 ($1,468.75 / spread).
Margin (subject to change): $648 / spread. Call your broker for more details.
Why: As bearish as I am the bond market in the long-term, I can’t ignore the tide turning and the charts changing. After the monster blowout in the fixed income over the last 6 weeks, my thinking is that we will see a retracement back to where we were in late May. With an exceptional amount of data out in the next 2 weeks, including the all important Fed meeting, I think futures spreads are an excellent way to trade through these reports. If the data comes out somewhat benign, I wouldn’t be surprised to see a short-term flight to quality. Since we do not see any Fed rate cuts or hikes in the next few months, and as stock investors start climbing a wall of worry, bonds could catch a bid here short-term. Place a time stop around July 1st.

If you cannot view the Bonds/Notes Chart, go here.

OCTOBER COTTON (CTV7)
TRADE TO CONSIDER
Option Write: Sell CTV7 60 cent call, Buy CTV7 65 cent call and collect 150 pts ($750 / spread).
Maximum Risk: Worst case scenario is option expiration with October Cotton futures trading at or above 65 cents, resulting in a loss of 350 pts ($1,750 / spread)
Target: A close in the contract at 60 cents or lower, which will collect the full 150 pts.
Expiration Date: 9/14/2007 (83 days)
Margin (subject to change): Call your broker for margin details.
Why: Cotton has made a spectacular move higher, in our opinion, riding on the back of the weather-driven grain rally. Seasonals, fundamentals, and COT numbers point to the rally being overdone, and you can notice that the market is starting to come off its overbought condition. Implied volatility is high enough to warrant the sale of this bull call spread, and we will likely ride out the trade until late August. More experienced traders could attempt to sell outright calls, but given the uncertainty of the weather and how it may spill over into this market, we would prefer this known risk strategy. Be aware that the contract high for October cotton is 63.35.

If you cannot view the October Cotton Chart, go here.

RISK DISCLOSURE AND DISCLAIMER:
THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CAN BE SUBSTANTIAL. BEFORE TRADING, YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL POSITION TO DETERMINE IF FUTURES TRADING IS APPROPRIATE. WHEN TRADING FUTURES AND/OR OPTIONS, IT IS POSSIBLE TO LOSE THE FULL BALANCE OF YOUR ACCOUNT. IT IS ALSO POSSIBLE TO LOSE MORE THAN YOUR INITIAL DEPOSIT WHEN TRADING FUTURES AND/OR GRANTING/WRITING OPTIONS. AS A RESULT, SELLING/WRITING "NAKED" OPTIONS EXPOSES THE SELLER/WRITER TO THE POSSIBILITY OF MARGIN CALLS AND VIRTUALLY UNLIMITED RISK. ALL FUNDS COMMITTED SHOULD BE PURELY RISK CAPITAL. PAST PERFORMANCE IS NO ASSURANCE OF FUTURE TRADING RESULTS.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT/LOSSES SIMILAR TO THOSE SHOWN.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST. THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST, OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS TRANSMISSION. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Drew Klein is a Commodity Trading Advisor and Principal of Greenrush Capital Management LLC, an introducing brokerage outside of Los Angeles, California. Drew has been a member of the National Futures Association in good standing since 2001 and has worked for some of the largest options firms on the West Coast.

Greenrush specializes in managed accounts and full-service retail brokerage for the more sophisticated client. Drew gives his clients the option of working with him either on a commission basis or an incentive basis.

Drew is a member of the Sigma Chi Fraternity, an organization whose trader hall-of-fame includes the legendary Larry Williams and Ed Seykota.

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