Option Trade 2/4/2020

Buy April 54 put @ 1.525
Sell April 52 put @ 1.10
Sell April 51 put @ 0.975

Total Credit $220.00 less $12.15 commissions for a profit target of $207.85
Suggested account size: $2,000.00
Targeted Returns: 10.4%
Trade duration: 73 Days Age of Trade: 12 days
Results to Date: +$147.85 = 7.4% gain.

Comments: Friday the April futures gained +0.225. This resulted in the April puts losing some value and the trade gained $40.00. The profitability on this trade is modest but the amount of capital put at risk is only $2,000.00. If an account this size makes three trades a year it ends up with a 30% APR gain. I read some place that Buffet has averaged something like 25% annual returns so consistent favorable gains result in outstanding performance.

On Friday I added the following trade:

Buy April 58 put @ 1.25
Sell 2 April 56 put @0.90

Total Credit $220.00 less $12.00 commissions for a profit target of $208.00. The broker where this trade was placed has a mildly lower commission rate.

In making this trade, I was focused on what the market would NOT do rather than what it would do and I considered the following:

1. The kill rate seems to be slowing with the kill this past week being +3.95% higher than the same week last year. That is down from a weekly average of +10.2% for the previous three weeks
.
2. Over the past four weeks the kill has been up an average of 8.6% per week year over year. From the H&P Report the numbers suggest it should have been up 6.68%. Perhaps some hogs were pulled forward over the past month.

3. The H&P Report suggests the kill will drop to +1.69% by the time the JJJs go to cash settlement. If some hogs have been pulled forward, the kill could drop even more than that.

4. With the ASF problem in China, world pork supplies are way down.

5. Most importantly, we ARE in the season when pork supplies decline!

6. We ARE producing more pork than the domestic market seems to be willing to carry off. If the coronavirus problem worsens in China and disrupts exports, the risk for this trade becomes significant!

Best wishes,

Doc