Sugar - an asymmetrical trade?

Following my reading, last week of Tony Robbins book, I have become more aware of the idea of looking at trading asymmetry. In other words, looking at the balance between possible loss and potential gain. An example of this was the US housing market crash, and the massive gain made by those traders who correctly predicted it and shorted the market. The same was true, and possibly more so of the subsequent recovery of that same market. A market that is backed by a physical commodity is unlikely to go to zero (free house, anybody?), so buying houses when the market is depressed makes sense. Buying houses when they are expensive makes less sense, although it still could make sense if the housing market continues to rise. The point that I am making is that it makes more sense to buy a physical commodity when it is cheap, than when it is expensive. Readers of this blog will have been aware of my long position in CORN, opened a few weeks ago. I think there is now a similar opportunity with sugar.

2014 12 06 SUGA


The UK sugar ETF (SUGA) has this last week fallen below the $12.00 level. The graph above shows two similar periods of time where the price of SUGA was sub $12.00, a few months in 2008, and a few weeks in 2010. Does the fact that it is now below $12 mean that it will go up? No, of course not, it could easily continue downwards. One should always be aware of this possibility. Fracking, for instance, has driven the price of natural gas downwards for longer than one would have predicted pre-fracking days. Oil has, in recent months, fallen through a previous level of support and could continue much lower. But will it go to zero? I think not. and I think this is the point: commodities don't go bust. A once great company with a share price that is falling may look like a bargain and may indeed be a bargain (Tesco?), but the concern is, ultimately, that it could go bust, and your investment disappear. Hence, buying shares that have fallen down can be a risky business (although I have recently gone long Tesco, if you are interested). But I don't think this is true of commodities. My feeling is that, at this low price, there is an argument that going long is an asymmetrical trade -  more potential upside to downside. Hence, this coming week I shall be starting to buy SUGA.

If you are interested in my views of the markets this week, click here (8min video)

If you are interested in the progress (or otherwise) of my open trades, then click here (7 min video)

Have a great week!






Popular Posts