1. To figure out what the market will do or
2. To figure out what the market won't do??
I ask that because I keep thinking about Norman Fosback writing, ""The Seasonality Indicator is potentially one of the most useful of all short term market indicators. But not surprisingly, it is a bit more complex and the profit opportunities, while ultimately enormous, are not so readily apparent."
and trying to develop an answer to his question of, "How then can you use seasonality to benefit you and increase the value of your own portfolio?"
We know the seasonality factor in the hog market is one of the strongest if not THE strongest of any market but simply buying summer futures in December or January does not generate consistent, low risk trades.
I have a scaling system for trading the calendar spreads that is working fairly well but it is a bit complex to work and something less complex could have more wide spread application; thus my question, "Which is easier?"
And I think the answer, hands down, no doubt about it is #2. TO FIGURE OUT WHAT THE MARKET WON'T DO!
For instance, is there anyone here who thinks the CME Lean Hog Index will drop to 20.0 by the time the JJJs go to cash settlement? That was a "Cake Walk" to figure out what the market would not do.
That example was a bit "Off-the-wall" but it illustrates the point even though it does not tell how to . . . "increase the value of your own portfolio".
Let's throw one more idea into the thinking process -
What is the one and only constant you can always depend on in the market place?
Why, it is the fact that time passes - - - today will end.
The "Seasonality Factor" and the constant of "Time Passing" can be the basis for the following systematic seasonality program:
1. Carefully follow the fundamentals to have a pulse on what the market is doing.
2. Four to six weeks before the spring and summer futures expire, if there is a significant dip in the futures buy a far out of the money put.
3. Sell one further out of the money put to help pay for the long put.
4. Sell another still further out of the money to pay for the long put and put some money into your account.
5. Now just wait for the magic of time passing to work and your portfolio will increase in value.
Here is an example of this program in action:
We are all aware of the ASF problem in China and the probability they will be importing pork but the index is going down. The seasonality factor tells us that the kill rate will slack off and the index will rally by the time we get to the Fourth of July.
So - - -
When JJJs fell below 62.00 on 2/4/2020 I bought an April 54 put at 1.525. To pay for it, I sold a 52 put at 1.10 and a 51 put at 0.975 so I received $220.00 of credit to my account. The margin requirement for this trade was about $700.00. An account of $2,000.00 would probably be sufficient to do the trade. If the JJJs go to cash settlement above 54 as I anticipate, the account shows a return of about 11.0% in 73-days. Should the CME Lean Hog Index dip to 53 the profits would scoot up to $620.00 and at 52 they would be $1,020.00 falling back to $620.00 at 51.
As of the close of business last night the trade was showing a profit of $60.00 after commissions. With the JJJs being up today, there will most likely be some premium decay and the profits will have increased.
I believe this is a fairly low risk seasonality trading program.
Even though the profit is not great, the profit potential could be increase merely by trading five or ten lots.
Starting in August this seasonality program would be reversed and calls would be traded instead of puts since the seasonality factor is down in the fall.
ITZ talks about hogs having an addiction to making five, ten and twenty point moves so buying the option that is eight or ten points out would probably be appropriate.
Best wishes,
Doc
P.S.: Have a great weekend everyone!!!