put my opinion in plain English: At some point between now and July, I
firmly believe we will see AT LEAST a 20% rally in this contract…meaning
about a $60 rally…or $6000 per futures contract…
And to capture that rally (if it happens) there are two steps I have to
One - Be there as a buyer somewhere close to the low when it is made.
Two - Stay there if/as the market rises…to NOT trade out of the position
too early (this IS the hardest part of this trade).
Why the 1 & 1 (buying units of 1 call & 1 put) is the PERFECT approach
here to achieve Step One…Buying somewhere close to the low.
begin with, there is NO way to know if a rally is going to start from
right here…or from $20-$30 or $40 lower…Nor is there any way to know
exactly WHEN it might begin…And believe me, with all the experience I
have, I still know that I am NOT going to figure out the timing by
reading the news and thinking, “I’ll know when the bull move is starting
and buy it then”. NO WAY. Nor, with the million charts (literally) that
I have studied, am I going to find some technical indicator that tells
me, “THIS is it!” I don’t know when it the rally will begin, or
even if there will be one, but I do know that the odds going back 20
years HEAVILY suggest that there will be one…And that it will be in the
20+% range…And the closer I can come to being a buyer at that low
tick…the better…which IS what the 1 & 1 will allow me to do.
ALL comes down to the math how option values change and following the
two rules below.
Rule 1 – If the market goes the wrong way (down), and reaches the point
where you are able to recoup 100% of your initial investment by selling
both the put and the call, you do so automatically. You do not start
thinking, “Let’s see if it will go further and I can make some money
going the ‘wrong’ way”. You take the money and start over with totally
new positions...at better price levels.
Rule 2 – Exactly the opposite of Rule 1. If the market does start going
the right direction (up), you do everything you can to leave it
alone…and let it RUN. Do NOT start thinking, “It’s gonna pull back. I’ll
get out here and get back in at a better prices”.
And I would add that if we do get, for example, just a 15%
upswing…believe me, you will not be crying about having “wasted” that
money on the put...Conversely, if the market heads lower, you will thank
your lucky stars that you bought the “defense.”
Nuts and Bolts – How this works
Here is the current set up and a few examples of how the numbers
actually would work…And remember, the whole point is to have been a
buyer at the lowest price possible…whether we are looking at it right
here, right now (quite possible I think)…or whether it is $20 lower…or 2
months later. WE JUST WANT TO HAVE BOUGHT THE MARKET AS CLOSE TO THE
LOWEST PRICE AS POSSIBLE…But I will reiterate, as much as history
suggests, and as much as I believe this will happen, it certainly might
So…Here is where you start…Buying the “1 & 1”
And if the market goes lower?
here is what you would now be looking at going forward …
what happens when (if) the market DOES turn up from this 290 area? When
it does make that last low tick that is going to be followed by a rally
similar to what we have seen for 19 of the past 20 years? Which I will
again caution, MIGHT NOT HAPPEN…But if it does, how do the numbers work
There are obviously an infinite number of ways Soybean Meal can move
during the next 6 months, such as:
just keeps going down…and NEVER rallies between now and the July
expiration…maybe taking it down to $250 a ton, or basically to the
lowest prices in a decade…at which point, I assure you, I would be stark
raving bullish…This is NOT some throwaway commodity that the livestock
of the planet can do without…And there is not ag product out there that
can be produced at 10 year ago prices.
Or, it can just go dead sideways for the next six months…basically doing
something that it has only done once in 20 years…which CAN happen and
would easily mean losing 100% of what you have on the table…BUT…Six
months sideways would likely result in option prices getting
tremendously cheaper than they already are today…AND… after doing
“nothing” for six months, my very strong opinion would then be that the
odds of a MAJOR upswing would have increased dramatically…And I
therefore would probably be thinking in terms of definitely increasing
the size of my bet. But make no mistake, doing what I’ve drawn in below
would lose you everything you’ve invested…
either of scenarios could mean losing 100% of your investment
(with the “never rallies” scenario possibly meaning you recoup
something via the puts), but
considering the very real statistics of what this market has done for
the past 20 years, this is, to me…NO question…the best risk-reward
situation I have ever seen. Again, this does NOT mean it will work…But
for any futures trader who has gone through all the historical data
here, and has been able to follow the math of how options do move…and
does have the RISK capital to take the trade…I just can’t imagine NOT
may end up being a loser, but I can honestly say, again, that I have
NEVER seen a better trade. Period.
And believe me, I do not make a statement like that lightly.
Here are the real numbers at today’s close again.
And here’s the long term…
Give me a call if you are interested or want to understand more about
what I am doing here. And by the way, I have to tell you that Soybean
Meal is probably the LAST market among ALL the agriculturals that any
analyst would be recommending as a buy. For real.
All option prices in this newsletter include all fees and commissions.
FUTURES TRADING IS NOT FOR EVERYONE. THE RISK OF LOSS IN TRADING CAN BE
SUBSTANTIAL. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS
SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PERFORMANCE
IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS NO GUARANTEE YOUR TRADING
EXPERIENCE WILL BE SIMILAR TO PAST PERFORMANCE.
The author of this piece currently trades for his
own account and has a financial interest in the following derivative
products mentioned within: Soybean Meal