Cattle weights have been increasing over the last part of summer. Much of this could be attributed to the optimal August weather we had which may have taken seasonal pressure off of weight gains. This past week we also had cash cattle trade $2-$3 higher than the previous week.
In my view I wouldn’t rule out some cattle being held back simply to put a few more pounds on them and to put off buying replacements for these cattle moving out to market. In addition one month ago we made contract highs in the live cattle futures.
There is an outside chance we could be making new highs almost a month later. Choice box meat also traded below $247 which in my view was considered a good support area. This is really a hard call here since we are just past the Labor Day weekend and the packers may be getting ready to see what the next thirty days will turn up as far as meat demand goes.
The Data
A look inside the numbers for live cattle showed slaughter was down 7.7 percent last week with beef production down 6.1 percent. Typically this time of year, futures trades at a five cent premium to cash, but coming into last Friday, futures were at a 3 to 5 cent discount. It is my belief that is what ignited a 250 point rally to start the week on Tuesday, before the market retraced to finish up 100 points for the session. Simply put, due to the fact the futures market is trading at a discount to the cash, it is my view we have more room to the upside.
The Trade
I would look at buying the October Live Cattle 155 call and selling the October 160 call for 100 points, or in cash value $400.00. The risk on the trade is the price paid for the call spread plus all commissions and fees. The maximum one could collect on the trade is $2500.00, minus all commissions and fees if the underlying futures contract settles above both options strikes at option expiration. For those more risk averse, look to buy Oct cattle futures at 152.50 on a dip, with a stop loss at 150.70. If filled this trade carries a $720.00 risk. These trade levels represent Fibonacci retracements for the last four months’. October contract highs are at 160.75 and the four month low at 144.25.
Webinar
For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup.
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.
