Lean hogs put in an interim top right around Halloween and have fallen off since losing just better than 7% dragging February futures to the up-sloping trend line that has acted as support since May. Though futures are currently oversold I am operating under the influence that the path of least resistance remains down and would suggest using the Fibonacci levels on the chart below as guidance. It appears live cattle to is headed lower breaking down the last two sessions and is testing a trend line that has existed since May as well. The breakdown in the last two days erased gains over the last two months with futures off 1.5% in the last two sessions.
Hog weights have started to top record levels and the pace of pork production remains stronger than expected at this time of year. This is due to pressure from cash prices and from futures contracts the last two/three weeks. Short term we could see spikes due to swine disease which has been known to kill litters of baby pigs but I expect that to be temporary and only a minor influence. Cattle futures are just starting to move lower facing technical pressure of late with a sharp reversal yesterday. Live cattle numbers/supplies are tight but prices are historically very high for beef. Packers are facing resistance all things considered with alternatives like ham and turkey much lower. What will be on you Thanksgiving table?
I suggest waiting for a rally in lean hogs before establishing any bearish trades. As for live cattle here are a few ideas.
- Short February futures and sell February at the money $132 puts 1:1. You should be short futures near $132 and collect approximately $825 per option. This option currently has a 50% delta. There is 81 days until expiration. This will provide a cushion in case futures trade higher. This is a bearish trade and you are looking to capture 35-50% of the underlying futures move lower. Exit both legs at the same time.
- Buy February $134/129 5 cent bear put spread. This starts in the money by 2 cents and should cost approximately $800-850 per strategy. Being a 5 cent spread based on the contract size of 40,000 lbs per this represents a $2000 spread. Look to risk half the premium paid ($400) and have a target of $1500.
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