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Aug Feeder Cattle.
- Thread starter Sandor54
- Start date
why do feeders exhibit backwardation while live cattle exhibits contango?
and yes, i'm biased to buy some bear put spreads on cattle. just trying to figure out what the best spread is.
still, i want to have an edge in my theory that prices are too high. aside from that, i'm just opinion building.
still, i want to have an edge in my theory that prices are too high. aside from that, i'm just opinion building.
would seem that structurally , live cattle is a cheaper market to buy puts in because of contango.
december 80/78 bear spreads for 28 pts
december 80/78 bear spreads for 28 pts
Quote from criveratrading:
why do feeders exhibit backwardation while live cattle exhibits contango?
Good question. I have mulled over this topic a little bit with Howard Simons (related to option implied theoretical cost of carry in LC).
The anwser is I don't know. However, neither commodity is storable. I cannot buy LC deliverable cattle today and store them until December. I can buy lighter cattle and turn them in Feeder cattle. My best understanding of the market is that the forward curve of both markets reflects the market's expectations of what cattle producers are willing and able to do. In my view the market expects live cattle supplies to decline relative to past seasonal markets while Feeder cattle come back into line with historical relationships.
Quote from criveratrading:
would seem that structurally , live cattle is a cheaper market to buy puts in because of contango.
december 80/78 bear spreads for 28 pts
If I buy puts they are going to be at the money or I am thinking of a butterfly. I can let a butterfly set with little risk while I wait for the market to come in.
I would rather focus on Feeders or on FC/LC spread. Feeders are a derivative of Live Cattle in one sense and if we price them as such they are the market that is out of line.
Expand on the butterfly idea...
Quote from criveratrading:
Expand on the butterfly idea...
I am just thinking of two ways to do this.
One is to setup a futures butterfly. Long August, short 2 October, long January (this is FC, but you could do LC too by adjusting months). This is a just a type of spread and when I chart it, it is oversold on both commodities.
With options I am looking at October Feeders. My option spreadsheet is not working tonight for some reason but I think you could put on a butterfly for about 1 point with about 3 times upside potential. You have a limited cost, benefit some from time decay and have a position that will see a delta increase if it moves in your favor.
I think either fly's or bear put spreads that are near the money will work great if the market corrects.
I know a number of locals use futures butterflys to trade longer term positions.
So graphing the spread (feeder butterfly AUG/OCT/JAN) i see it clocking in at -4 or so. The range seems to be -7 to + 9. Sure buy it to the low of the range and sell the butterfly at the high of the range; but understanding WHY this spread (purchasing the fly) works well in bearish markets/corrections is not conceptually easy to understand.
Quote from criveratrading:
So graphing the spread (feeder butterfly AUG/OCT/JAN) i see it clocking in at -4 or so. The range seems to be -7 to + 9. Sure buy it to the low of the range and sell the butterfly at the high of the range; but understanding WHY this spread (purchasing the fly) works well in bearish markets/corrections is not conceptually easy to understand.
Right now it would be a risk controlled way to build a position that I see working if FC corrects lower. October is a seasonally weak month for feeder cattle-it may not be this year but historically it is. Combine some risk controlled positions and you can ride out volatility. I need to analyze the options butterfly but the overall reason I like them is that I don't see either market crashing but more likely moving methodically lower-if they ever do.
When I charted the spread this morning I am getting different results than I did earlier. I need to revisit this but right now the LC butterfly looks better technically as a buy than FC.