Option Trade 2/14/2020

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: 15 days
Results to Date: +$147.85 = 7.4% gain.

Comments: Tuesday the April futures gained +1.20 and the April puts lost a good bit of value but the results for this trade remained unchanged at +$147.85. I have quite a few of these ratio spreads on my boat for a total premium credit of just over $3,000.00 net of commissions. Profits to date stand at $816.75.

Tuesday I started building a portfolio in the May puts. Liquidity is not very good in the May puts but I was able to selling two naked May 66 puts at 2.15 so I am a little underwater there. In a few days I will buy a May 68 put.

Conventional wisdom says, “Never, never, ever sell naked options because you take on unlimited risk.”

But when you buy or sell a future, don’t you also take on unlimited risk? So the risk is no different. The thing that is different is the risk/reward ratio with the reward being limited to the premium received.

And that is the beauty of the seasonality. We know that there is ALWAYS a seasonality high and a seasonality low in the hog market. We are now in the chase looking for the seasonality high.

The May futures settled premium to the component by 18.20. On average over the past eight years, the index has gained from mid-February to the seasonality high 22.54. The least it has gain was 12.71 in 2018. If we get a repeat of the least gain, we get a seasonality high of 68.18. We don't know when it will be posted but the trend in the Index IS up until the seasonality high is posted. Looking at the higher bids in the morning reports and the jump in cutouts yesterday, the trend may be ready to turn UP.

HHhhhmmmm!! My perception is there is probably not a lot of risk in selling naked May 66 puts and defense is quite easy in the event the market moves against the trade.

Best wishes,

Doc

P.S.: “In the hog market you can ALWAYS expect the unexpected!” Long Bear