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Cotton trade is currently under hedged – Plexus
Dec '12
Plexus reported that New York futures traded slightly higher this week, they remained well within the boundaries of a narrow 6 1/2-month trading range, in which the March contract has moved no lower than 66.85 cents and no higher than 78.02 cents. This tight range of a little over 11 cents stands in stark contrast to the historic 150 cents swing that preceded it.
It feels like the life is being sucked out of the cotton market at the moment and a look at the chart shows just how weak its pulse has become. Since the end of June the trading range in March has narrowed to 823 points and over the last five weeks is got reduced to a mere 426 points. The lack of direction and momentum has led to an implosion of volatility, with the spot month now showing a reading of less than 21%, whereas it was still close to 30% about two months ago. This is good news for anyone who needs protection for his position, because options premiums have become very affordable. For example, the March 70 puts traded today as low as 115 points.
Open interest continues to fall as well, as traders will sooner or later lose their appetite for these range-bound markets. Exactly a month ago, on October 29, total open interest in futures had reached a 20-month high of 208’031 contracts, but it has since fallen precipitously and amounted to just 161’790 contracts as of this morning, the lowest level since January 20.
The drop in open interest is even more pronounced when we look at the CFTC report, which includes futures as well as ‘delta’ positions in options. On October 30, the combined open interest still amounted to 321’481 contracts, whereas the most recent report as of November 20 had it at just 217’473 contracts, or about a third less! December options expiration as well as the drop in volatility had a lot to do with this shrinking participation, but be that as it may, the futures market feels rather deserted at the moment.
When we look at the breakdown of who currently owns what stake in the futures and options market, we have small and large speculators with a 0.55 million bales net short (5.81 million bales long vs. 6.36 million bales short), while the trade was 6.32 million bales net short (4.38 million bales long vs. 10.70 million short). On the opposite side of these trade and spec shorts we have index traders with a corresponding 6.87 million bales net long position. 
In order to anticipate the market’s next move, we need to figure out what these market participants are likely going to do with their positions. Starting with index traders, which are the most predictable, we are probably going to see an increase in their net long position by an estimated 7’000-8’000 contracts due to the annual index rebalancing, which takes effect in early January. 

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