Sugar Looks Strong: Here's How to Get Long with Limited Risk

Establishing a position is all about Risk/Reward. It can be difficult to initiate a position with limited risk and harder, if you are trading futures, to know when to take a loss. By utilizing options, one can predetermine his risk and still participate in significant upside potential. For those of you who are bullish the Sugar Market, the strategy described here may be an excellent way to establish a position and enable you to sleep very comfortably every night. If you’re not interested in Sugar, but are interested in other markets, similar strategies can be created to meet your risk/reward requirements.

Each evening I use my Options Price Sheet to assist me in evaluating the Implied Volatility Skew in multiple markets. By looking at the implied volatility, I am able to ascertain which markets give me a theoretical edge based on the Black Scholes Model. If that edge meets my market bias, it enables me to establish a position which I can feel comfortable with. The Table below provides a look at a strategy for getting long May Sugar. It involves Buying the 31/33 Call Spread and Financing it by Selling the 28/26 Put Spread. The details are below, including the Maximum Profit and Loss (in points) and the Settlements Prices from Monday’s trading. If you are interested in setting up strategies including ratios, fences, and long and short outrights, call me at 347-949-4546. Evaluating implieds and Greeks are essential for establishing worthwhile positions. Combine that with a savvy market bias and the opportunity for profits increases substantially.

BK1		Long Call Spread		Strike Diff=		200				Approx.		Distance		Max .
Settlement		Short Put Spread								Pct.		to Settle		Profit/Loss
2945		1st Call Stk. Price		3100						5.26%		155		215
		1st Put Stk. Price		2800						-4.92%		145		-185
		Strike One		Strike Two				Stk One		Stk Two				Credit or
Calls		3100		3300		Calls		148		94		54		Debit
Puts		2800		2600		Puts		139		70		69		15

(Source: http://www.insidefutures.com/article/228776/Sugar%20Looks%20Strong:%20Here's%20How%20to%20Get%20Long%20with%20Limited%20Risk.html)