Many commodities have seen pullbacks over the past week, but these types of corrections can bring opportunities for traders wanting to establish bullish positions at cheaper levels.

Crude oil made headlines last week by posting its worst one-week decline since December 2004, dropping more than 11 percent the week of July 14, 2008. Sugar, used for fuel as well as food, dropped 10.7 percent last week.

Hedge funds and institutional players have been unwinding some of their long commodity positions in the past few sessions, which some are speculating is an effort to raise some capital amid a cash crunch. According to the latest data from the Commodity Futures Trading Commission as of July 15, index traders, funds and small speculators all reduced their net long exposure from the prior week. I think the market is getting oversold and should bounce off support.

This market had rallied in June and into early July as expectations of a global supply surplus reversed, turning to an expected deficit. That should continue into next year’s crop. In its latest report, the USDA has reduced its world ending stocks estimate for 2008-2009 to 607,000 tons from 1.273 million tons, causing a market peak on July 11 at 14.15 cents a pound in the ICE October sugar futures contract.

I recommend looking a little farther out, and consider the March options for a bullish strategy. These options expire on February 17, 2009, so this is basically a “set it and forget it” type of trade. I consider a relatively inexpensive strategy that offers a good risk-reward ratio.

I recommend buying the March 200915-cent call, and selling the 17-cent call. The 15 cent call’s theoretical value is around 1.09, so subtracting the other call at 0.67 is about 42 points, or a cost of $470 (42 x 11.2) plus your commission charges. That will be your defined risk. If this trade is successful, your maximum profit potential would be $2,240 minus the $470 you paid for the spread and your commission charges.

I think this strategy offers a nice risk-to-reward ratio if sugar rebounds. If the market does fall into the single-digits, I would recommend covering the top end of the spread, and let the long one ride out. In general, when you think longer-terms trends remain in place, corrective pullbacks offer great opportunities.

October ICE sugar futures are inching up after a weak open, last trading at 12.55. March futures were recently trading at 14.08.

Feel free to call me with any questions you have about this strategy or others to suit your particular account size and risk tolerance. Ask about our special half-off commissions offer for new clients.

Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders.

These interactive, live webinars are free to attend. Go to www.lind-waldock.com/events to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors. © 2008 MF Global Ltd. All Rights Reserved. Lind-Waldock, Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.