The selling was mostly option related. Sep implied volatility began at 30% and peaked at around 35%, greatly exceeding historical, or actual, volatility. We saw high options volume every day. Yet, the delta positions on the COT increased only a bit. This is a very odd situation considering the high volume and the fact the delta rises on its own with rising prices. Nevertheless the futuresí selling by commercials was mostly options related with some origin selling. The combined long delta position of commercials and specs of 96,000+ lots remains high.
Spreads were volatile but the lead spread, and the spread most subject to the roll, uniformly dropped in value. In unison with this drop in value is the drop in position by managed money. It appears that funds who are short the front month need to buy spreads to roll while other funds are obviously long spreads. As the shorts covered their outright position, the need to roll decreased. The July OI dropped by 35,765 lots.
In Robusta the price pattern was obviously the same as in Arabica with the arbitrage value widening as the market rose. Activity was also mostly similar as every sector covered while commercial and swap dealers longs sold into the strength. The number of managed money funds on the short side in Robusta is also dropping.
The following days we had a major drop in prices as long sellers simply overwhelmed the buyers. The Real sharply corrected higher at the same time and the market stabilized to some degree on the final two days. But Friday although it appeared tha funds continued to cover, signs of fragility were present. The roll, or FND season, is certainly a factor. With Thursdayís option expiration, there may be support/resistance at the striking prices. So we may have conflicting forces at play.
Longer term, it is reassuring that the funds are covering and possibly, hopefully, reversing. Although I am a believer of the power of the macro, as John explained in a past post, I donít know if the Fed lowering of rates will motivate a strong macro reaction. Rates may drop but the reason is not to keep inflation in check but rather because of the negative consequences on global economies as a result of tariff wars. On Friday, I liquidated my metals positions and bought gold puts. Coffee will remain affected by physical supply and demand, and by policies of the Bolsonaro administration. A high supply still exists and can potentially increase if deforestation is implemented and more coffee is planted. For now the market is propelled by short covering but for this week all predictions are off.