The summer of 2010 saw cocoa prices go sharply up much to the resentment of bears. Analysts said there wasn't anything fundamental driving the move; it was simply hedge fund manipulation. Backing that up, cocoa price fell back from a 33-year high at over $3,400 a metric ton down to about $2,600 in September 2010. But the political unrest in Ivory Coast is now again pushing the prices up. The main ICE second month futures contract reached up to a one-year peak of $3,390 a tonne just recently (this is quite a jump when you think that cocoa was trading at $2,840 just a few weeks earlier!). The former French colony is the world's top contributor to the global chocolate supply, making up 40% of global supplies.
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When you've got markets making new highs... they become attractive to trade.
That key chocolate ingredient factors in heavily to the Ivorian economy. Cocoa is its biggest source of revenue, with sweet bean sales valued at $45 billion annually. But the Ivory Coast's cocoa trees have long-term problems, leaving aside the political problems that are now besieging the country. And the political problems have once again pushed cocoa price back up over $3,300.
Soft commodities like cocoa have certainly been quite exciting over the last months and spread betting in these circumstances represents a high risk, high reward way of speculating on cocoa prices.
Let's take an example of a spread bet cocoa.
On February 02 2011, IG Index, quoted cocoa at 2186.0-2190.0, which represents the price in Sterling of London cocoa futures. The difference between the bid and offer prices is 4 pts; 2186 being the price at which you could sell and 2190 the price at which you could buy.
Let's assume that you sell at 2186, putting up £20 for every point the quote moves. The deposit factor is 84 so you will need to put in £1680 to open this position (84 x 20).
To cover your potential downside you link a stop loss order to the position at 2254, so that the spread bet is automatically closed should the cocoa market move against you. Thus, if the price of cocoa drops to 2045, you will make £2820 (141 x 20). If the market moves against your position and your stop loss is hit, you will end up losing £1360.
This trade doesn't take into account slippage since you would likely be slipped a few points given that cocoa prices tend to swing wildly. Naturally, the £20 represents a considerable risk as the price of cocoa is highly volatile but you can reduce this risk by lowering the stake.
Second Example: Selling London Cocoa with a Controlled risk bet.
You think that the price of London May Cocoa will go down. Cocoa is quoted in £/tonne. One point = £1 per tonne. You want to strictly limit your potential losses should May Cocoa rise in price, and so you open for a guaranteed stop spread bet.
Let's say that you call for a May price and are quoted 2095.0/2101.0. A guaranteed stop would cost you +/-4 pts extra spread. So you would sell at 2095.0 - 4 = 2091.0. Your instructions is to 'Sell May London Cocoa, £10/point, Controlled risk Bet, stop 2150.
Open position: 2091.0.
Closing position: 2150.0.
Difference: 20 points = 59 x £10 = £590.
This is exactly the maximum you could afford to lose - no surprises here as the bet was closed for exactly this reason.
Cocoa Spread Betting Market at IG Index
Market Hours (London Time) 09:30 to 16:50.
Minimum £2.
Deposit Factor: 84.
Minimum Stop Distance: 6.
Expiry Date: 11/03/11.
Last Dealing Date and Time: 11/03/11 16:50.
Settlement: Settles basis the official closing price of the Liffe Cocoa future on the last dealing day.
Rollover Info: Usually, initial position closed at official closing level of day before last dealing day +/- closing spread; new position in next contract opened at official closing level of the new contract from same day, +/- 60% opening spread (and CR premium).
Note: Most soft commodities are usually traded in $ (although you can always spreadbet in the currency that suits you), an exception being Cocoa (London) which is traded in Sterling.
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