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Fat Cattle Need To Diet

ByMatthew Bradbard
Published 01/17/2014, 01:56 PM
Updated 07/09/2023, 06:31 AM
LCc1
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Record high after record high with April live cattle trading near $140 Thursday before stalling.

Line In The Sand
The red horizontal line drawn on the chart below serves as my line in the sand. It will take a settlement below $139 to confirm an interim top. Ultimately I see futures on this contract trading back to the trend line that comes in just below $135 in April futures, which represents a 2.8% loss in value.

Supplies of slaughter-ready cattle remains historically tight, forcing meat processors -- even retailers -- to pay up to fill orders for their beef products. It's been a vicious cycle! A break in cash prices would be a preliminary sign that prices on the board are due for a setback. Reading a piece on Reuters Friday AM, a livestock analyst made a great analogy, when you stretch the rubber band too far, it can sometimes stretch too hard the other way when it snaps back.

A setback would likely start with profit taking and, as I alluded, watch for cash prices as a precursor to futures setting back.
April Live Cattle Futures
The Play
Short (1) April live cattle futures targeting a trade under $135, current trade at 139.25. As opposed to a stop or open-ended risk, let's buy a February 141 call to stop us out if the market continues to run higher. You have protection for the next 22 days.

That option should cost approximately $350 per. If futures roll over, you make in the futures and lose in your option. Worst case, you lose the premium paid plus 75 tics -- or $300 per futures, depending on exact fill. So your looking at about $700 of risk per strategy as long as your out on options expiration.

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