Coffee is one of the last cheap commodities currently on the markets, according to an article on the RMB Group website. The current price is just above good long-term support at $1.10 per pound, discounting most if not all of the ample supplies currently priced into the market. Option prices reveal that option sellers believe coffee has lost its “kick” — at least for the foreseeable future, seeing a “decaffeinated” market extending well into the future.
Still, global demand for coffee continues to grow exponentially, especially in countries like China, where Starbucks plans to open 6,000 stores by 2022. This could eventually lead to China becoming a bigger coffee market than the United States.
However, no-one knows what the catalyst will be to jolt coffee out of its current sleepy state, and when it will appear. But it remains true that markets like coffee don’t remain in a slumber-like state forever. History tells us that when coffee does finally wake up, it will do so in an explosive manner. Given its cheap current price, inexpensive options and short position complacency, RMB Group believes coffee calls could offer patient options traders very good value for money.
As an example, RMB suggests that its trading customers should consider purchasing the March 2019 $1.45/$1.60 bull call spreads on coffee for about $690, where it recently sold. But it has the potential to rise as high as $5,625 should coffee reach its projected $1.60 per pound price prior to the expiration of the March option. A trader’s maximum risk in this transaction would be the amount paid for the trade plus transaction costs. The rewards are more than eight-fold.
Thoughts from Other Traders
Matt Choi of Certus Trading is also a fan of trading big with options, including coffee. At Certus Trading, he offers courses to show exactly how he uses options to profit from big moves in equity options. This “hedged” strategy plays both sides and is exactly how professional traders make money with options regardless of whether the stock moves up or down.
But, Matt Choi cautions that being a professional trader takes time, and should be viewed like any other profession in terms of commitment.
“Once you are able to consistently make money trading a hundred bucks, now you are ready to trade two hundred bucks. And once you are able to succeed with trading two hundred bucks, then you can trade four hundred, eight hundred, sixteen hundred, thirty-two hundred bucks, and so on,” Choi said in an interview with Young Upstarts. “This scaling up process is one of the most important skill sets to have in order to achieve ultimate success. To summarize, having the proper education and experience help keeps your money safe, while having the ability to scale up gives us the opportunity to be very successful.”
The options market is huge — and coffee is just one of its many asset classes. But it’s unusual in that the price for coffee futures remains low, despite what is no doubt strong demand in the future for the popular product. This is how forward-thinking investors can make a profit in such markets. Not every trade is as obvious as coffee, but there are plenty of other similar products and stocks in the futures market for inquisitive investors.