Tis’ the Season for Selling Orange Juice Calls

Tis’ the Season for Selling Orange Juice Calls
Dec

9

2016

Tis’ the Season for Selling Orange Juice Calls

December Marks the Beginning of the Orange Harvest in Florida – and Often Lower Prices for Juice

In The Complete Guide to Option Selling, I discuss several core commodities on which to focus when building a commodities option writing portfolio. But there are some other markets that we also mention as occasional additions that can add “flavor” to your portfolio at different times of the year.

The flavor for December is Orange.

December marks the beginning of the Florida orange harvest

December begins the annual Florida orange harvest. While the US is second in global production of oranges (12.5%) to Brazil (33.4%), Florida “juicing” oranges still make up a considerable portion of the FCOJ contract on the ICE. This makes developments in the Florida crop a key fundamental for the futures contract.

As you may know from our past seasonal analysis of markets, harvest can be a key time of year for price movement in agricultural commodities.

Many investors only knowledge of the Orange Juice market comes from 1983’s “Trading Places,” starring Eddie Murphy and Dan Aykroyd.

But In today’s market, Orange Juice is a commodity most often dominated by commercial players. Public interest isn’t what it used to be and thus, the options aren’t always as liquid (excuse the pun) as one would hope.

Late in the year, however, that can change. An early frost in Florida Growing regions can damage the just ripening fruit. Over the course of history, this has provided a (very) few high-profile price rallies in juice just prior to harvest.

A Shifting Fundamental

Yet, a December freeze in Florida is extremely rare. This is, after all, is why they grow oranges in Florida. More importantly, however, is that the advent of these “freeze years” has brought a fundamental shift in the geography of Florida Orange groves in the last decade. Growing regions have moved decidedly further south, making the Florida crop much less susceptible to early freezes.

This has not stopped the public from bidding up prices in the fall in anticipation of “freeze season.” In fact, the October-December time frame can not only bring fresh buying to the OJ market, it can bring a surge in option volume as hopeful speculators pay up for lottery tickets – hoping for another early freeze. It is unlikely that Tom Smith in Cleveland who is “trying” futures for the first time has heard anything about southern grove migration in Florida. All he heard was his broker excitedly telling him about the “big freeze season” coming up.

The Seasonal Tendency to Watch

The other, and perhaps bigger problem with the freeze argument is this: Once the harvest begins in earnest – most often in December, prices have a historical tendency to decline. This can and often has happened rapidly. This seasonal price decline has typically occurred as speculators, realizing the market is about to be inundated with a year’s worth of new supply, hurriedly unwind long positions.

This tendency is illustrated in the seasonal average chart below:

March Orange Juice Seasonal chart

While past performance is not indicative of future results, Orange Juice prices have historically tended to decline starting in December. This has most often been the result of the Florida orange harvest successfully beginning.


Of all the commodities, orange Juice is the only market that allows me to look out my back door and get a firsthand look at the fruit. I can tell you that it hasn’t been below 50 yet where I live. And most of the oranges are grown south of me.

At the same time, OJ prices have been in an impressive uptrend for most of the fall – coinciding closely with seasonal averages for the past 3 months.

FCOJ (Frozen Orange Juice) Daily Continuation Chart

FCOJ Daily Continuation Chart


Orange Juice prices have rallied into December – as is the historical tendency. While past performance is not an indicator of future results, orange juice prices have tended to “top out” in December and trade lower into the spring as new harvest supplies flood the market.


We’ll be giving our updated estimate for the 2017 Florida Orange Crop to Reuters next month. In the meantime, we project the 2016/17 harvest beginning right on schedule.

Strategy

As December is a month where selling orange juice options often becomes viable, we are currently pricing calls 40-50% above the market.

If you are a client, we’ll view additional price strength this month as opportunities for selling high premium calls to the public in the coming weeks.

If you are not yet a client, because price selection is key and orange juice calls are not as liquid as a crude oil or gold contract, we’ll have to forgo recommending a strike to you in the best interest of our private clients.

However, should you wish to consider taking some premium on your own, we suggest looking in the price areas mentioned above.

Tis the season to sell Orange Juice calls. And we anticipate this season being much like the many that have come before it.

Have a Happy Holidays and we look forward to seeing you in the new year!

James Cordier is author of McGraw-Hill’s The Complete Guide to Option Selling, 3rd Edition and head portfolio manager at OptionSellers.com – a wealth advisory firm specializing in option writing portfolios for high net worth investors. James’ trademarked Premium Sniper investment program has been used by elite investors from the US, Australia, the United Kingdom, Singapore, Malaysia and Dubai. For more information on privately managed option selling accounts with James and OptionSellers.com, visit www.OptionSellers.com/Discovery.

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