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Trading Coffee Futures

Updated on August 17, 2010

Trading Coffee Futures

If you have ever considered trading coffee futures, you better understand the “lay of the land” before just jumping in. It’s easy to fall victim to all of the “hot tips” and supposedly exclusive inside information about a particular commodity market, but please keep in mind, most “hot news” has already been factored into a commodity’s price. When it comes to coffee in particular, you really have to get a good feel for the price action of this market before committing your real-deal money to it; this is why I recommend that you begin by paper trading before “going live”, so to speak. It’s good for a trader to learn the “personality” of a market before really going full bore with it, and that is what paper trading can afford you. If you try to learn the market by jumping in with real money right off the bat, it can cost you dearly later, so in this business, patience is a definite virtue. One thing is for doggone certain, is that coffee is one volatile market. It’s not nearly as erratic as cocoa, but it can certainly take the unwary trader for a ride, so again I say, proceed with caution. As far as the contract specifications for coffee, it is actually traded on the ICE (Intercontinental Exchange), and its symbol is “KC”. I always think of KC and the Sunshine Band whenever I read that, for whatever reason…who knows why my brain works that way. Anyway, one futures contract of coffee represents 37,500 pounds of the good stuff, so it is a whale of a lot of java if you ever wanted to take physical delivery of it. Fundamentally speaking, coffee usually has very volatile price action in the summer due to the potential for freezing in some of the main exporter countries in the southern hemisphere such as Brazil, Colombia and so forth.

Image courtesy of Google Images
Image courtesy of Google Images

Coffee Futures Trading

Coffee is considered to be one of the “Foods/Softs” commodities, along with orange juice, sugar, and the like. As far as the tick value for coffee is concerned, since coffee futures are quoted in cents per pound, a one-cent move is equal to $375.00. Again, this is nothing to play with, so you better make sure that you are a well-capitalized trader before even attempting to tackle this market. Just recently, as of this writing (Summer of 2010), coffee broke dramatically to the upside after a major period of accumulation (and a head-and-shoulders bottom) under 140. The breakout saw coffee prices hit a high of 181.50 within a span of less than two months. Just think about it: A price move from 140.00 to 180.00 is a 40-cent move, and with coffee’s tick value being at $375.00 per cent, 40 cents times $375.00 equals a $15,000 move in less than two months, per contract!!! Imagine if you were long about 10 contracts of coffee and then that price move hit—you would be banking around $150,000 in less than two months—not bad at all! But again, remember that leverage is a two-edged sword…if you were the poor soul who was short coffee at 140.00, you would have seen a $15,000 per-contract loss from that same price move. Of course, most sensible investors would have bailed out of coffee if they were short after the first dramatic spike up in prices, but let me tell you, even on the first day of the major breakout coffee still made an eight-cent move upwards—that’s about a $3,000 move in price, so anyone short on that day, even if they were able to get out before the end of the day, would have felt some pain regardless. So yes, trading coffee futures can be extremely lucrative, but you would do good to trade with protective stops, or even a call/put option opposite of your position to hedge against losses.

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