Lumber futures might signal economic upturn

November 22, 2011 9:20 am

The futures are traded in dollars per 1,000 board feet (mbf). One Random Length Lumber futures contract on the Chicago Mercantile Exchange has a lot size of 110,000 board feet. That is information you should be aware of once you start to trade them. Next, always be aware of the margins. The current margins at CME are: Initial Margin $1816.00 and Maintenance Margin $1,210.00 per contract. The (minimum) tick size is 0.10 ($11 per contract), thus 1 full point fluctuation means a profit or loss of $110 per contract.

Lumber futures rally

After hitting a low in November, CME lumber futures advanced sharply on firming cash prices and support from the latest monthly housing starts data. Market participants stated that improved buying interest in cash markets set the market in motion for a rally.

Also the (US) October housing starts were better than expected, which were down 0.3% month on month albeit above the expected -8.1%. Housing (building) permits rose 10.9%, the highest since March 2010.

Traders said that short covering also aided the gains. The January futures contract hit a three-week high and closed up the daily limit of $10/1,000 board feet to more than $241.70. If lumber manages to construct a decent uptrend, this might indicate that the US housing market picks up again.

A bullish trading strategy

The chart of the CME group illustrates the rally from the $225 level towards $245. At this level we might expect resistance. Once it will be broken, technical analysis shows you an expected rally to the minimum target of $265. Although not going in a straight line, Lumber might rally to $300, which is the peak of September. That is why I look for a bullish strategy: for instance buying the futures or selling put options.

An alternative is to sell a call against one long future. For instance the Jan 250 call is traded @ 10.50 with $244 in the future. So, the maximum profit would be (250.00-244.00) + 10.50 = $16.50 (or 110×16.50= $1815.00 per contract).

On last Friday (18th of November), the Jan 220 put could be sold @ 7.30 (x110 = $803 received per contract). That means that (on expiration the break even level would be 212.70. In any case, I would cut the loss and reverse the bullish position if LB would break below the November-low of approximately $224.