$2,000 Thursday – Our Webinar Trade on Oil Pays off Big Already!

Phil - "Another odd reaction is the stock of Frontline (FRO), whose tanker was hit."

We didn't start the fire

It was always burning

Since the world's been turning

We didn't start the fire

No we didn't light it

But we tried to fight it – Billy Joel

No, we didn't start the fire…

However, we did go long on oil in yesterday's Live Trading Webinar as it tested the $51 line and now Iran has apparently attacket two tankers in the Strait of Hormuz with torpedoes, critically damaging one of them and US ships are heading in to assist and Oil (/CL) is already at $53 (up $2,000 per contract) and Gasoline (/RB) has blasted from our long position at $1.68 to $1.725 and that's up $1,890 per contract but both could squeeze higher as the shorts wake up to a nightmare scenario.

This is a tragedy, we may end up in war and it's certainly not the way we wanted to be right (fortunately no one was hurt) - we simply bet that Oil and Gasoline had gotten way too low based on Fundamentals and the fact that they exploded higher on an incident simply proves our point. We will keep $400, trailing stops (10% of the profit) at this point as we may end up with another $2,000 gain from here – hard to say how high the squeeze will take us at the moment.

Another odd reaction is the stock of Frontline (FRO), whose tanker was hit. Rather than going lower, FRO is up 8% this morning as it's an old tanker and they'll be happy to get the insurance and it's one of 61 tankers they own and, with oil higher, they'll be making more money – especially if trips get longer as tankers try to avoid Iranian waters.

In other commodity news, Soybeans have really taken off, and the September contracts (/ZSU19) which we had featured over at Seeking Alpha on May 10th at $825, just hit the $900 mark and those pay $50 per $1 more PER CONTRACT so that's a lovely gain of $3,750 per contract and we are very content to take those off the table now but we are still in our options play on the Soybean ETF (SOYB), which was at the time:

As to SOYB, it hasn't been this low since, well, ever – as the contract began in 2012 at $25 and never really went below $17.50 until the trade war began so $14.50 is quite a bargain and, although it an be tough betting on Trump here, it's POSSIBLE we get a trade deal and that will hurt our hedges in the Short-Term Portfolio so, in order to hedge the hedges, a bullish bet on SOYB makes sense. For the STP, we can:
Buy 50 Nov $14 calls for $1.10 ($5,500)
Sell 50 Nov $15 puts for 0.95 ($4,750)That's net $750 and, if SOYB goes back to $16 on a trade deal, those options will be worth $1.50 each for $7,500 on 50 100-unit contracts, which would be a 900% gain of $6,750 – not bad for an offset and our worst case is owning SOYB at 7-year lows and we can then sell calls to reduce our net $15.15 entry.

As you can see, we hit close to the bottom on our entry and got easy fills on our contracts as SOYB headed lower. Now the Nov $14 calls are $2 ($10,000) and the $15 puts are 0.60 ($3,000) for net $7,000, which is already up $6,250 (833%) in just over a month and, at this point, I'd cash out 1/2 the calls ($5,000) and put a stop on the other half at $1.50 ($3,750) and a stop on the short puts at 0.75 ($3,750) so we net out no less than $5,000 for a $4,250 (566%) gain but we MIGHT do much better as only 60% of the usual Soy crops have been planted (due to prices that were so low there was no point in planting) and, now that prices are improving, the weather has turned bad and the planting window may have closed.

There's also the issue though of China culling about 1/3 of their hogs due to swine ebola (yes, it's very bad!) and that could still curtail demand, which is why I don't want to press our luck. This is the first time we've ever played Soybeans but it was such a compelling situation that we had to jump in at the time. As I said yesterday in the Webinar – we go where the news flow takes us and are always on the lookout for good Fundamental situations to trade off of.

Speaking of Fundamental trends, Colorado just announced they have generated $1Bn in marijuana revenue and they credit the industry with creating "tens of thousands" of jobs as well as being a huge positive for Commercial Real Estate. PSW Investments is forming a new Cannabis Capital Fund, so we're very pleased to hear that – especially as Colorado has less than 6M people in the state, representing just 1/50th of the US population – it bodes very well for the future. Illinois (13M people) just approved recreational marijuana use – the 11th state to do so.

So far, Michigan and Alaska are the only states that voted for Trump and have also legalized the recreational use of marijuana but it's already decrimilized in North Dakota and Ohio and Medical Marijuana is now available in 34 states so this is a genie that is NOT going back in the bottle at this point and we still like the MJ ETF (MJ), which is still hovering around $32.50 and we already have it in our Long-Term Portfolio as:

We got in early and had good timing on our entry but, as a new trade, I still like it very much as I think $40 is a very conservative target for next year so, as a new trade on MJ, I would go for:

  • Sell 5 MJ 2021 $30 puts for $6.20 ($3,100)
  • Buy 10 MJ 2021 $30 calls for $7 ($7,000)
  • Sell 10 MJ 2021 $40 calls for $3.50 ($3,500)

That works out to net $400 on the $10,000 spread that's $2,500 in the money to start you off. You are obligated to buy 500 shares of MJ for $30 ($15,000) between now and Jan 2021 if that person chooses to assign you (and the stock doesn't have to be under $30 but it's doubtful you'd be assigned otherwise) so make sure you REALLY want to own 500 shares at that price but, if all goes well, MJ heads over $40 and you make $9,600 (2,400%) in 18 months – that's nice!

The net ordinary margin on the $30 puts is just $1,990 so it's a margin-efficient trade as well and the 5 biggest holdings in the MJ ETF are GW Pharmaceuticals (GWPH), Aurora Cannabis (ACB), Cronos (CRON), Cannopy (WEED) and Tilray (TLRY) – mostly on the Toronto Stock Exchange so this is an easy way to get into the business from our 51st state.

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