Falling Commodities

The bad news is that my puts on S&P;’s Basic Materials ETF, symbol XLB, ended the week down some 18%. The recent mini-bull market lit a fire under nearly everything and took the ETF to just above $30.40. On Friday, it took a steep dive down to $29.99, a penny below the option strike price of $30, but that wasn’t enough to put us positive yet.

“My, my,” I can hear you muttering, “down 18% in a few days. What’s gone wrong with Jason’s normally conservative approach?” The answer is that this is not my normally conservative approach. As I mentioned in my April 5th post explaining my reasoning, options are very risky and if you don’t understand them then you should skip this investment. Puts on XLB is an aggressive way to profit if prices of basic materials companies retreat before June 17th, as I believe they will. Options fluctuate more widely and quickly than stocks and mutual funds. If XLB continues Friday’s downward trajectory, we should see this position move solidly into the black quickly, from minus 18% to plus 18% and higher, one hopes. There is absolutely no guarantee, however, which is why you need not feel bad for letting this idea slip right on by. Options are not for everyone and should be used only with money you can afford to lose.

That said, here’s to hoping we don’t lose and why I think we won’t.

First, if you’re slow getting to your email these days, then you have a chance to buy the contracts 18% cheaper than I paid. That’s a free service I’ve been offering a lot around here lately. I suggest buying something, then I buy it, then a week later you have the chance to buy it cheaper. Happens on the sell, too. I say to sell Maxtor at an average price of $5.35, then you have a chance to sell it at $5.66 within two weeks. Who says procrastination never pays?

Back to those XLB puts. One reason you might want to take advantage of the price being cheaper than what I paid is that the chart makes XLB look ready to move lower. Reminder: puts gain as the underlying security goes down. If you needed that reminder, don’t pursue this investment! Notice on the 3-month chart that the first real support is around $28. The 6-month chart gives us secondary support at around $26.

Another reason to expect lower prices is that analysts are souring on commodities across the board. From Briefing.com’s Friday market wrap:

Energy (-1.6%) was the weakest of the 10 losing economic sectors, amid oil’s fifth straight day of declines, while Materials (-1.4%) was a close second… The latter was dragged lower by a sell off in Steel (-3.4%), spurred by a downgrade on U.S. Steel as well as analyst comments about declining prices, a reversal in earnings momentum and a potential global supply demand imbalance.

This is precisely the short-term trend that I’m trying to grab here. I reiterate that I believe the long-term trend is for higher oil and commodity prices, but the short-term should see lower prices and thus a gain on the put options.

Just what companies are we talking about here? XLB’s top ten holdings include Alcoa, Dow Chemical, DuPont, International Paper, Monsanto, and Newmont Mining. Only Alcoa gained on Friday. The rest dropped, and contributed to XLB’s 1.45% drop. Here are current quotes for the top ten holdings.

With last week’s general market rise we saw an improvement in Ultra Semi. The position rose a bit and is now down just 3.2%. With a little help from the oft-predicted but as-yet-unseen rotation away from energy stocks into chip stocks, we should finally get back into the black and be able to sell at a profit before summer.

Speaking of summer, it can’t be far away when Japan is in hanami season. A hanami is a drinking party under the cherry blossom trees. It actually marks the arrival of spring, but the weather is so warm and sunny that it feels like summer already. The blossoms are in full bloom this weekend around Sano, where I live, and I partook in the spring tradition of eating and drinking myself silly under their pink canopy. Here’s a photo I took of the hanami with koi flags in a nearby city called Tatebayashi. Within walking distance of my apartment is Sano City’s Shiroyama Park, where I took this photo of people painting sakura.

I hope that you’re enjoying spring wherever you live.

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