Coffee and sugar are two commodities that are looking bullish from both fundamental and technical perspectives, and I’m recommending some options trading strategies. Grab a cup on ICE.

Technically, you can see on a weekly continuous chart that coffee has been in a bull market since 2002. The market has been posting higher lows on pullbacks, so it’s formed a nice upward channel. The market has been consolidating for a couple weeks, but volume has been picking up the past couple days following the July options expiration on Friday, June 13. The Slow Stochastics reading, a momentum indicator, was oversold but has been tuning up and signaling a breakout. I see $1.55 a pound as a good target in the September ICE Futures coffee contract.

On Friday, June 13, the USDA reported ending stocks held by producers were at 12.4 million bags, the lowest level since the 1960-61 crop. There is a record expected on global output in 2008 and 2009, but cooler temps are forecast in southern Brazil, and that might push prices higher if there is talk of freezes.

I recommend buying the September ICE September coffee $1.3750 put, which will cost about $2,812, not including your commission charge. That’s your defined risk on the option. You can set your buy-stop at $1.40 for a breakout. If you don’t get filled, prices should decline back to the consolidation area and you might want to pick up a coffee future at $1.35, again, with our target at $1.55. You can also buy the $1.45/$1.60 September call spread, which is running about 4 cents, or about $1,500 not including your commission charges. The target is for the spread to fully widen to 15 cents, so subtracting the 4 cents you paid, that comes to $4,125, minus your transaction costs, as your profit potential. September coffee options expire August 8.

I’ve also been watching sugar, which has climbed amid speculation of a slow harvest in Brazil, the world’s biggest producer. The July options expired Friday, June 13, and it looks like additional longs were put on into the October 2008 and March 2009 contracts. I think it’s a good time to establish a bullish position, and the farther-out months should gain more premium. There’s support just a touch under 11 cents a pound in October futures. If the market breaks 10.75, we’ll see stops get hit. But I am recommending bullish trades at this time. Consider the 12 cent - 14 cent October call spreads, where we saw funds buying last week. You can trade the 12.50/14.50 or 13.15 call spread, for example, but as this market is volatile, I recommend calling me for detailed strategy to fit your particular risk tolerance and account size. The October options expire September 12.

Watch the dollar also as you trade commodities, we’ve also had a run up in the dollar recently, but if the dollar weakens, that will support prices in commodities overall.

Feel free to call me to discuss these ideas further, or for ideas in other markets. Ask about our special half-off offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.

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