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.
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.
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.
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.