Last week we traded cash-cattle steady to a buck lower.  If one takes into consideration that box meat dropped around $20 from the top, I would say that cash-cattle trading a dollar lower is quite an achievement. The annual cattle-inventory report showed all cattle and calves 101% of last year.  This was contrary to the market potentially thinking we had not started expansion yet.   This suggests the possibility that we are not culling old cows as fast as we should, and that quite a few heifers have been held back.

We started off the week with energies up Monday and Tuesday with volume contract high in crude oil, RBOB, and diesel fuel.   On Monday, the first day after the report, cattle and feeders were down early after the annual inventory report, rallying only to close feeders limit-down.  Hopefully, Tuesday we will see some turn around action in the cattle and feeders. 

Recently, trading cattle has been a rapidly descending affair and finding a bottom is difficult.  As I said, I consider last week a success as cattle traded steady to a dollar down. This week, I believe we need to trade cattle steady, if not higher to maintain the idea that cattle can trend higher.  One positive factor is weights are starting to decline.  This can be attributed to harsh conditions in early winter.  In addition, some cattle are starting to carry mud which limits weight gain and lowers conversion.

With winter and harsh conditions far from over and pre-bookings for summer possibly beginning for the summer in late March, I propose the following trade.

The Trade

  • Buy one April live cattle 155 call and sell two April cattle 165 calls for 90 cents or in cash value, $450.00 cost.
  • The first risks here are the price paid for the spread plus all commissions and fees. 
  • The second risk here is if the underlying futures contract trades over 165.00 basis April futures prior to option expiration, and gets exercised, it would leave the position one short April cattle at 165.00.

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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.