April 28, 2009
Short Cattle NOW.
The following four points were taken from my trading "philosophy" on the Croker-Rhyne.com website...I believe they perfectly describe the current set up in cattle.
1. Futures are inherently volatile...and my perspective is, what we are really trading is volatility. All the markets will have periods of sideways action, but all of the markets are frequently trying to move up, or down. Your objective is to be going with them when they are really going somewhere.
2. Select markets which have done nothing for a long time. If a market has been trading sideways for quite some time, probabilities "should be" (anything is possible in the futures markets) better it is soon going to move somewhere. Long sideways moves are often followed by large directional moves.
3. Or select markets at price levels at which you can make the statement, " It will not stay here, and, in fact, should move a long way from here, one way or the other". As an example, you might look at a market making the same low for the fifth or six time in six months and say, "I don't know which way it's going, but it's not going to be right here six months form now". Obviously, it could be, but, again, probabilities "should" favor it moving far away from this old low, and this move could be either substantially, down or up.
4. When you find something you like, put your money on it, but buy some options going opposite your opinion. This goes against everything you will feel. You think you are right or you wouldn't be making the trade. Most of the time, my recommendations are in units of two calls to every put for bullish opinions, or two puts to every call for bearish opinions.
Live Cattle have basically been dead sideways for the past six months...Aside from the fact the current economy is definitively curbing demand (and prices) at restaurants, as well as sirloin steaks in general, neither of which is bullish for cattle prices, the August Live Cattle contract shown below simply looks, to me, to be ready to truly fall off a cliff...and trade down, at least, to the 70 cent area before August goes off the board.
As I firmly believe this contract is either a bottom (and going to prove me very wrong) or is about to go relatively straight down from here during the next few months (and prove me very right), this, then, is the perfect set up for the trade outlined by my "philosophy".
First up, here is August Cattle going back to last year's all time highs in cattle prices...
Here is a closer look at the same contract, with the cost, at today's close, of our basic "2 and 1"...The truth is, what happens when you are wrong in this business is a lot more important than when you are right. When I look at the chart following, what I see is that if I am wrong, the move necessary to recoup 100% of what we are spending per unit just doesn't look that big...And 100 days is PLENTY of time for this trade to develop one way or the other.
Give me a call if you're interested...I think they are poised to "go" any day now, so the sooner you call the better...