June 25, 2014
Special on Feeder Cattle
There are 149 days until the expiration of the November, 2014 Feeder Cattle options.
Between now and then, even if this market can go higher, I think we will have a massive…CLASSIC…commodity market crash and Feeder Cattle prices will be FAR below current levels.
Obviously, I may be wrong but this is the way I see it.
Right now, the November 214 Feeder Cattle Put costs about 6 cents or $3000.
EVEN if Feeders continue to go up from here, I believe a “flame out” will have occurred LONG before November and I think it would be EASY to see this market back at 180.
At 180, this option would be worth $17,000.
To be clear, if I am wrong, and this market can stay ABOVE 214, the option would be worthless at expiration…But I obviously do not think this will be the case.
I think this is an incredibly attractive risk-reward situation…but you can judge for yourself from the charts that follow.
Here are the “visuals”.
Now take a look at that option when viewed from the longer term perspective…
Does 180 or 190 look like a reasonable expectation to you ? Sure does to me…
Here are some recent tops and declines in Feeders to give you some reference as to how they DO top out and go down…
My experience has been that generally there are NO signals that tell you, “This is it. This is the end. The top”. Markets just STOP. It’s over…and now it’s time to go down…and I think these examples bear out what I am saying…The important point is, all you can do is make you best guess. Buy puts when you think it has become “nutso”, and maybe be ready to do some more if you later realize you were early…But I absolutely believe you DO have to be there before it starts.
Like I said…When they stop, they just stop…and start down. And when they ARE going down, they just seem to go and go and go…Also note that all of those moves came at MUCH lower levels…In other words, if they can routinely drop 20-25 cents when Feeders were trading a $1.00 lower, 20-25 cents from current levels should be EASY to see.
I’d pretty much have to say, if you are a speculator who ever does trade on the short side…and this idea does not appeal to you…I can’t imagine what you WOULD ever want to short. The truth is, I think this trade is simply a question of spending the money to own the puts, and then being ready to do it again at higher levels, or at a later date if necessary. I have YET to see one of these sort of rockets that DIDN’T eventually fall out of the sky…In fact, I have yet to see a single commodity we trade that ONLY goes up. This market WILL hit the skids. Being short WILL be a profitable place to be…and I think, in a VERY big way. Obviously, this is all my own opinion and everything I think may be wrong…and if so, following my recommendations could easily mean losing whatever you invest.
From these levels, Five months is a ton of time…and I think there is NO WAY this market can hang here for that long.
I THINK THIS IS A KILLER, AND I HESITATE TO SAY IT BUT I WILL…MAYBE ONE OF THE BEST SHORTS I HAVE EVER SEEN. NO IT’S NOT CHEAP, BUT I THINK IT IS ABSOLUTELY WORTH IT…
Give me a call if you are interested.
The author of this piece currently trades for his own
account and has financial interest in the following derivative products
mentioned within: Feeder Cattle