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‘Overpriced’ Coffee Options Poised to Fall: Technical Analysis

Coffee traders should sell “grossly overpriced” options on New York futures to take advantage of a recent rally, said James Cordier, a portfolio manager at in Tampa, Florida.

Options giving the right to buy September coffee futures at $2 a pound have jumped as much as fivefold to 4.86 cents since reaching an all-time low of 0.83 cent on June 8. During the same period, the September $2.10 calls rose as high as 4 cents from 0.66 cent. The two contracts are the most held among September call options. Coffee futures for September delivery slipped 0.05 cent to $1.6075 on ICE Futures U.S. in New York yesterday.

The spread between the 30-day implied and historical volatility, a measure of the divergence between expected and past price swings, was at the highest level since June 2009, indicating traders see greater volatility in the near future, options trading monitored by Bloomberg show.

Coffee futures would have to surge at least 24 percent for those “grossly overpriced” options to be profitable before they expire on Aug. 13, said Cordier, who manages about $100 million in assets, including coffee options. That is not likely to happen, with the bulk of Brazilian supplies becoming available in a few months, he said. Brazil is the world’s largest producer.

Coffee may tumble to its “fair value” of $1.45 and $1.50 “in a week or so,” Cordier said. “We would be selling these very expensive options right now.”

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