Live Cattle: Buyers appeared to face little resistance as basis is terrible in the fat market. Exposing ones self to risk is one thing when there are safety measures, but when the safety measure doesn't kick in until after a $10.00 drop, one could break a leg before the hedge kicks in. Further consolidation in price, waiting for to see if there are further shifts in discretionary spending after this week holiday, is about all there is to do. In my minds eye, I only see two ways of attempting to manage the positive basis. Which way you lean has some to do with it. If you are more worried about missing out on the top side, then buy the at the money put option and consider rolling up if the opportunity were to present itself. This will produce a minimum floor with a predetermined premium paid for the option for which the buyer is at risk 100% of. This strategy will produce a higher premium paid for the option and lower minimum sale price, but offer unlimited upside potential minus the premium paid. If you lean more towards the market moving lower, then sell the futures contract and buy the $3.00 out of the money call option. You will achieve a higher minimum sale price, but you will increase the loss, up to the call strike price by the spread between where you sell futures and the strike price, plus the premium paid for the option. These are sales solicitations. You are correct if you thought both were unattractive. They are. We are in an unfortunate time frame of having to work with what is available.
Feeder Cattle: Seemingly, there is going to be more inventory available than first thought on the upcoming video sales. This appears as a lateral move with some using the high price to go out on top, while others will attempt to grow. Prices continue to triangulate with further downside to go before meeting up trend lines. While there is no doubt there was elasticity in the feeder cattle, but none as stout as the futures. Now, all of that is gone, and can move in both directions. As well, the large drop seen in today's index reading may suggest that the cattle feeder may have paid his last penny higher. I do believe opportunity abounds in the ability to hedge with futures and options. No, nothing like what it used to be, but still adequate to manage the risk you have assumed. Oh, and just in case you forgot, you are managing the largest amount of working capital risk in history.
Hogs: Hogs were lower today. The index was down $.28 @ $89.47.
Corn: Corn and beans are in bear markets. Rallies are to be expected but used to market into if you have not. Beans are expected to continue lower as more acres will go in behind wheat. If you used the options hedge strategy on corn, I recommend that if December corn trades to $4.00, buy back the short call option portion of the three way spread. This is a sales solicitation.
Energy: Energy is sharply higher again today and I believe I have been grossly wrong. I'm hesitant to go bullish just yet, but seemingly, I have missed something. Worse, is gasoline nearing contract high and going to apply more pressure on consumers discretionary spending.
Bonds: Bonds are sharply lower again. The inflation continues and now with high expectations of a new Democratic candidate, there is no telling what may happen now. The sell off could be a lack of faith in the ability of the US government. After having watched the debate, and the discussion of their golf game, I'm a little concerned.
Christopher B. Swift is a commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "Mid Day Cattle Comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com
An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources and other relevant circumstances. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. .
