Last week, January 5th through January 9th, has been one of the most volatile ever experienced in cattle prices. Box-meat, live-cattle, and feeder-cattle futures all experienced huge moves.  The reasons behind the volatility are the packers upped the ante on cattle, and the funds came out of the futures in a big way. 

Some suggest we probably are going to have to bring the futures up to meet the cash, but that is not my opinion.  With the funds coming out of their long positions, they probably won’t be back into the market from the long side. Any futures appreciation will mostly come from the speculative trader, and it is my contention the long speculative trader has had a belly full of the cattle market.

What originally led this rally were the live hogs, but we are now having a hard time finding any fund or outright speculative longs in that market.  The demand for red meat is still good but at what level?

Because we have paid such huge premiums for the feeder cattle, we are finally starting to come into the part of the cattle market where break evens are now much higher than where the futures are, but the cash cattle are making up for it.

The Trade

Simply put, I would look to sell any rallies. A conservative way to trade this market using option premiums would be to look at a put spread in live cattle.

  • I propose buying the April Cattle 148 put and selling the April cattle 138 put for a price 1130 points or in cash value $520.00.
  • The risk on the trade is the price paid for the spread plus all commissions and fees.
  • If the market remains absent of funds reentering the market, I look for lower levels below the 150.00 to eventually be tested.  

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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.