Wow, who's idea was it to get rid of the floor brokers? Two days and two locked up limits as Z'08 reached 109.00 synthetically soon after options opened and served as the first spot for shorts to stop the bleeding. We are now seeing an historic squeeze on the commercial shorts as margin calls close to 10 cents per contract were digested overnight.
For those who are not familiar with synthetic trading, when the futures market locks up the limit, you can still buy the market by purchasing the at the money call and selling the put at the same strike price. Basically, the premium you pay for the call over the put added to the strike price will give you the purchase level.
This was how the majority of buying has taken place the last two days as hedge funds have had to do very little and been able to ride the market higher based on the forced liquidation of many commercial shorts unable to cover margin calls.
Ironically, this type of short squeeze also happened in wheat about a month ago when we traded over 20 dls/bu synthetically while expanded limits kicked in, but the physical futures price in Chicago never broke 12 dls/bu.
There was actually a bearish rumor from China in the wheat market today which broke the rally in grains and contributed to a late morning pull back in cotton which allowed us to trade electronically for the first time this week.
However, it did not last long and we were soon back to trading synthetically with May, July and December all trading in the triple digits! With such high volatility and panic buying and selling today we created a 20 cent trading range from the open to close in options.
Volume was at an all time record with 52,000 futures and 130,000 options as we should see a big cut in open interest tomorrow with several of the commercial shorts being forced out.
Technicals are in new territory synthetically as 400 point limits still apply, but some of the momentum did come out of the market on the close. Soybeans and corn closed near limit down as well as the major part of the commodity complex. Synthetic cotton future settlements were about 120-150 pts above the market at 90.10 for K'08, 91.43 for N'08 and 96.00 for Z'08.
The stock market continues to struggle and the dollar feels weak, but commodities are all in overbought territory as the cotton relative strength index is reaching 85.
