Deconstructing the DBA

With a looming world food crisis, DBA might be worth a look as a tactical play on a scenario that will probably get worse before it gets better. Food riots last week in Haiti, where some of the population have resorted to eating "cookies" made from dirt, vegetable oil and salt while other food riots in Egypt, Vietnam and several African states are on the rise. Try to buy rice in Costco these days. . .nada. As food commodity prices soar and scarcity increases, food is quickly becoming the new oil.
AROON is on a BUY. Really a basket of futures, the DBA reflects a diversified base of agriculture products with a variety of calendar strikes looking forward.

As noted above, open interest in the DBA is hardly robust. DBA is currently at 38.27 with an almost 50/50 put/call balance. Heaviest interest is in the 36 puts (10,500 contracts), trading on a dime spread and recently filled at the ASK. Daily volume is typically less than 100 contracts in the puts and 100-250 in the calls, so it's difficult to finesse the bid/ask spread. Use limit orders.

A simple May ATM (38) buy/write 38.27/1.70 yields 4% at expiration and breaks even at 36.57 (minus commissions). Not a bad RR for 25 days.

The June 38 buy/write 38.27/2.65 yields a little over 6% and breaks even at 35.62.

Something to consider. Short interest in the DBA is clearly on the rise. Latest reported figures are now 3 weeks old (4/1), but shows a dramatic increase since Feb 1 and a topping out pattern currently in progress. Whether the current short interest reflects a substantial short stock, long call hedge strategy is doubtful given the level of call open interest.

Finally, the 3 linear regression study (30,11,3) is showing a retracement in progress back to the upper LR30 channel. The lower technicals are currently neutral, although poised to turn positive. Retracement back to the LR30 mean would take the DBA down to 34.50, a scenario that seems unlikely in the midst of the emerging food scarcity geo-economics. A more likely scenario would be "kissing the channel goodbye", . . . a pattern discussed in this weekend's Qs update. The Qs themselves have changed short term momentum and no longer appear to be kissing the channel goodbye. . .however, the situation with DBA may be a different story altogether.