The 800 Pound Live Cattle Gorilla

Well that time of the month is nearing in the cattle futures pit once again. That’s right sport fans it’s the big bad Goldman roll.
I will be looking for the roll to begin in live cattle futures around the middle of next week. That’s the 7th or 8th of November in case you don’t have a calendar handy. Usually the Goldman roll is a 4 to 5 day affair.

So as traders how can we take advantage of the Goldman roll this month?
Below is one idea you may want to consider in CME Live Cattle Futures:
Long December 2006 Live Cattle / Short February 2007 Live Cattle.
Look to initiate this spread from (-2.75) through (-3.50). It can get ugly on the settle at times, so to trade this spread you must have the fortitude to withstand these “distorted” settlement prices.
This spread settled today, (I’m writing this on Monday October 30, 2006), at (-2.83 ).
December settled at 88.67
February settled at: 91.50
Spread = (-) 2.83 under
Historically speaking, during strong years this spread has traded as high as around +0.75 over. If you were to look at all years combined this spread averages around (-) 1.00 under. Based on this fact alone the current Long December / Short February spread can be initiated at “fire sale” prices.
click on the chart to enlarge
Live Cattle Futures
Please Note: This live cattle futures spread chart is only showing prices as of Friday October 27, 2006.
Look to take advantage of major selling in the December and major buying in February, this is commonly referred to as unwinding for those who may be new to futures trading, as the roll moves into gear. This spread could potentially widen out anywhere from the present level of around -2.80 to as wide as -3.25 through -3.50 during the roll.
However, once the roll is completed I will be looking for this spread to move back to around the (-) 1.50 under area in rather short order barring any type of weather related event such as a blizzard in South Kansas into areas such as Amarillo, Texas. The probabilities of that happening are around 1 out of 12.
For purposes of risk management a potential exit area can be pegged around the (-) 4.00 under area. However, this would only be for a core position. If you add to the core position in the (-) 3.25 through (-) 3.50 area you can move your targeted money management exit area below the (-) 4.00 area.
The Goldman roll can and does exaggerate market prices to extremes. However, once the roll is finished the market typically returns to a more “normal” ground. We want to capitalize on this exaggeration of prices by entering into a long Dec. / Short Feb. spread.
I’m seeking to initiate a core position at present levels. However, if this spread should get into the -3.25 through -3.50 area I will get mind numbing aggressive on this spread by adding to the core position in a major way.
Happy Trading,
Paul Skarp

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