Hog prices are soaring as the effects of African Swine Fever (ASF) are finally starting to hit home in pork-loving China. We wrote about ASF in a September blog post and recommended a six-month option play to try to take advantage of higher prices caused by a supply shortage directly related to the disease. The market ignored the potentially devastating effects of the disease and went nowhere for months. But, as the chart below illustrates, things have changed:
Data Source: Reuters
Three weeks ago April hog futures were trading at 53 cents per pound – 37 cents below our original 90 cent target. This morning they are trading for 78 cents per pound, proving once again the wisdom of the most famous “Yogi-ism”: “It’s not over until the fat lady (or in this case, fat “piggy”) sings.”
Wildly bullish action in the hog market means the April 80-cent / 90-cent bull call spreads that we suggested buying for $700 or less back in September, and had pretty much written off, are now trading at a price slightly above where we initially purchased them. That’s the good news. The bad news is they have just 18-days left until expiration.
This leaves us with a choice. Do we take our money and run? Or do we let crazy bullish scenario caused by this disease play out a little longer? It is a tough call, but a great choice to have given where our spreads were trading just a month ago. The next 18 days will determine whether this trade is a home run or just a long out: worth as much as $4,000 or as little as zero. How you play it depends on your tolerance for risk.
Here’s our take:
RMB trading customers owning more than one of the bull call spreads referenced above should consider exiting half at current levels. Hold the balance for a move above 80-cents per pound. Exit all remaining positions should our 90 cents per pound target get hit at any time during the trading day.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1991 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com.
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The RMB Group
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