February 4, 2014
This is a follow up to the Feeder Cattle newsletter from yesterday in which I expressed my very bearish attitude towards this market.
Here is some historical research on the April Feeder contract which suggests using a strategy of buying 2 puts and 1 call makes tremendous mathematical sense, in that, according to the data below, this trade would theoretically have either broken even or produced an attractive profit in every April contract for the past 10 years...Obviously, theoretical probabilities do NOT axiomatically mean the results will be the same in the future, and if they are not the same, it could easily mean losses instead of profits…But for my money, I think the risk definitely is worth the potential reward.
Repeating a bit of information from last night’s newsletter: One of the GREAT aspects of Feeder Cattle options is they expire together with the futures contract. In other words, you don’t see an option expire 3-4 weeks before the contract does, then watch the market do what you were hoping to see it do…after the option expiration has taken you out of the game. Instead, you can stay in this option until the contract actually expires as it is a cash settlement market. There is no taking or making delivery to worry about, and if so desired, you can stay with your opinion through 100% of the contract’s life of trade.
Here are the facts for the past 10 years. What you should note from the charts is how much this contract has moved (in both cents and percent per contract) between now and expiration…in one direction or the other.
April Feeder Cattle – Largest move, in either direction, between Feb 1 and expiration
Here are all those charts summarized in tabular form:
April Feeder Cattle – Price action Feb 1 to expiration
What I get from this?
In 9 of the 10 years, the move was AT LEAST about 10 cents…or more.
The smallest year, a 6.45 cent down move, with the market having started at 88.87, still meant about a 6.7% change in the contract value. With today’s market being about 1.68, a 6.7% change would mean about an 11 cent move.
A 10% move would be almost 17 cents in at today’s contract value…And I am going to say, all things considered (RECORD HIGH PRICES FOR ONE), I think we WILL see at least a 10% move, one way or the other between now and the April 24th expiration…79 days from now.
If my expectations do become reality, here are some possibilities as to how the trade might potentially work out…
Ok, these are real numbers…not just contrived to get anyone excited…And although some of the moves during the past 10 years were not straight line affairs, the data IS all real…Historically speaking, a 7% move is NOT a big deal, and really, neither is 10%...Therefore, although these stats do NOT make it axiomatic this trade will work (and if April just sits there between 167 and 168, you WILL lose 100% of what you have on the table), I DO VERY MUCH LIKE THE ODDS HERE.
As I am forever pointing out, a major part of trading is simply the math (not so much your opinion)…and I LOVE THE MATH HERE. The numbers don’t lie. The fact is, this trade would have theoretically worked (having either recouped 100% or having made money) in every one of the past 10 years, and although this certainly does guarantee it work in 2014, it is a risk I am willing to take.
And from yesterday’s newsletter, here is one more long term look that helps emphasize my point that this market DOES move…that sideways is not the norm.
Still Shorting Cocoa
And very quickly, I am still very aggressively buying puts in Cocoa. Per my January 28th newsletter (see it under newsletters on the crokerrhyne.com website), Speculators still hold RECORD LONG POSITIONS versus Commercials who still hold RECORD SHORT POSITIONS and I firmly believe this market could easily drop 400-500 points between now and the May contract expiration.
Pick up the phone if you are interested. I think this one is pretty much a “here and now” situation.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Feeder Cattle, Cocoa