Today's Idea
A quick look at the daily chart for April Live Cattle shows good chart support at 110.00, and even stronger support around the 107.50 area. Traders expecting these support points to hold may look into selling puts in Live Cattle options with strike prices below these support points. For example, with April Live Cattle trading at 112.975 as of this writing, the April 107 puts could be sold for about 1.000, or $400 per option, not including commissions. Given the neutral to bearish view from the USDA cattle inventory report, some traders may be able to receive a better price for selling these puts if prices decline this week. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in April should the April futures be trading above 107.000. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to buy back the short option if the option premium trades at 3 times the amount received for selling the option originally.
Not to be outdone by its porcine brethren, Live Cattle futures have been stampeding higher, rising over $23 per hundredweight since June of last year. Good demand for beef and the potential for additional exports to South Korea, which has destroyed about 10% of its cattle due to the spread of hoof and mouth disease, have futures prices trading at a premium to the cash market price. Prices have moved of their contract highs the past few sessions, as traders evened-up their positions ahead of this past Friday's release of the USDA's semi-annual cattle inventory report, which showed 99.582 million head as of Jan 1st. This was 1% below last year's totals, and slightly higher than the average pre-report estimate of a 1.4% decline. Although the numbers were above expectations, this is the fourth year in a row where cattle inventories have fallen. The report is expected to have a bullish influence on deferred Feeder Cattle futures, but may initially pressure near-term Live Cattle futures. However, with the U.S. cattle herd now at 52-year lows, any significant price weakness this week may be met with fresh buying, as the supply outlook appears like it will remain tight again in 2011.
Technical Notes
Looking at the daily chart for April Live Cattle, we notice the market moving steadily upward since June of last year, as a smaller cattle herd and improving beef demand kept prices moving higher. However, the price spike to contract highs of 116.600 may have been too strong of a move, especially as cash market prices failed to move swiftly higher and a much needed correction took prices back towards the 111.000 level prior the USDA report. The most recent Commitment of Traders report shows large speculators liquidated almost 4,000 net long positions for the week ending January 25th. However, the large speculative long position still remains at a robust 99,907 contracts. This could be the catalyst form some near-term price weakness, as the USDA report was not as "bullish" as most traders expected. Prices should find some chart support at the recent low of 109.900 made back on January 5th. Resistance remains at the contract high of 116.600
Mike Zarembski, Senior Commodity Analyst