Another Straddle Opportunity from Stuart...

[wayneL]

...Johnston, author of "Trading Options To Win".

I don't suppose many here have access to futures options but here it is:

Just suppose
SAJ - Wednesday at 1:30 PM

That there's a market, that, during a particular period of the year, has:

1) since 1980, had an average movement in price, one direction or the other, of 23.54%,

2) since 1980, had a movement in price, one direction or the other, of more than 15% in 23 years (out of 28),

3) in each of the past 10 years, had a movement in price, one direction or the other, of not less than 19%, with an **average** max movement of 24.68%. In 7 of these years, the max movement was higher, and lower in the remaining 3),

4) had, in only 1 year (1991), a maximum price movement of less than 9%,

5) a principal component of its price dependent on other mkts, and said other mkts are enormously volatile this year.

...care to guess which mkt?

It just happens to be June Lean Hogs, from July 4 to June 14-15 of the next year. Now, all this wonderful (cough) data is mildly interesting, but suppose also that...

...the ATM straddle in this mkt is selling, right now, for just 11.62% of the current mkt price.

No need to suppose. This is exactly the situation in LHM8 this minute.

This, my friends, is an outright steal. If there were a table somewhere around here, I'd be pounding it. There is, effectively, no reason (well, other than shortage of capital, of course) not to take a piece of this trade. Hey, if someone wants to leave a big stack of $100 bills in the public square, I **will** help myself, thank you very much.

It's not even terribly expensive, notionally 865 points. The June oppies are quite thin, though, so I'd be prepared to pay 880-900...but you never know. The ATM puts (74 strike) actually have an OI of 150.

Now, there's no way to say for certain, but even with the enormous value potential here, I'm inclined to wait a little bit, perhaps a month, before executing this little theft. Why?

The IVs of the June oppies have recently been falling out of bed, down to 15% as I write this. This is historically very low for LH oppies, but picking bottoms in either mkts OR volatility is not my style. I'll wait and see if IV looks like making something resembling a bottom before acting.

One tip on the trade. Ordinarily, one does not hold a straddle until close to expiration. This time, however, it looks like it might be right to do so if there hasn't been a satisfactory profit in the first half of the trade (which, btw, has occurred in 18 of the 28 years). Turns out that, in the past 28 years, the contract high or low has been made in May or June on 15 occasions. Just a thought.

Now, of course, if you happen to think that the corn and bean mkts are simply going to go dead in the water, and if you happen to believe the hog mkt is at or near equilibrium, why, then you don't want any part of this straddle.

However, the magic word is 'equilibrium'. If you think this, don't bother with 'equilibrium'.

Just take a few Librium, instead.

IMNNHO, price volatility in the grain, oilseed, meat, and foodstuffs mkts rates to be increasing, probably strongly, in the next year. Which event can hardly leave the hogs and their oppies untouched, now can it?

Good trading to all !