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from a traders point of view

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VB RANCH

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Mid-Day Cattle Comments

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Futures trading is not for everyone. The risk of loss in trading futures can be substantial; therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not indicative of future results, and there is no assurance that your trading experience will be similar to the past performance.

My opinion thinking out loud.

Insurance companies calculate premiums on home owners, automobile, motorcycle, boat, and health by assessing the risk of potential demise of the insured product or person. The length of time the product or person will be insured, the value of the product or person, and past personal history of the person are all factors that are considered when assessing a premium for the amount of insurance they will be purchasing.

Individuals, funds, or companies calculate premiums on options for commodity futures in a similar manner. The length of time, value of the contract, and historical volatility are factors that help to determine what premium an option strike price is priced.

All written is "In my opinion". The world appears very volatile. Not just the physical harm of wars and terror, but financially. I perceive that a great deal of individual investors and traders have left the market place. Between the stock market, and housing crash, of '08, the multiple actions taken by the Fed, and the MF Global fiasco, these factors appear to have done seemingly irreparable damage to the stock and commodities markets. Fundamental ideas have been skewed by the Feds Quantitative Easing policy. The advent of high frequency trading is perceived by many as an unfair advantage to average investor/trader. The stalwart laws that govern the commodities markets were tested and perceived failed upon the actions of Jon Corzine. This loss of individual traders is perceived to have had a significant impact upon volatility of market fluctuation. The amount of capital that governments have created through interest rate twists, bond buying repetition, and quantitative easing provides tremendous amounts of capital for only a certain few. Similarly to the food chain, I liken the situation as to the little fish have been eaten. The larger fish have been eaten, the sharks are now around and looking for more to eat and potentially there is a whale out there that will come and consume all the sharks.

Long story shortened. The perceived financial volatility has the potential to move prices of various commodities, stocks, and interest rate instruments in an enormous fashion. Options on futures contracts, to help "insure" prices against an adverse incline or decline, may or may not be of any benefit to your business or operation. However, similarly to the situation unfolding in cattle, that purportedly came out of left field, it's these types of situations that I perceive options to be of benefit.

Live Cattle:

Fats are a little firmer today. I don't anticipate much activity due to the extended weekend. Unlike the top of the market coming abruptly, I do not anticipate an abrupt reversal right back to the previous contract highs. In my opinion, a huge amount of capital has been destroyed in multiple sectors of the industry. This situation is not perceived as going to be over with quickly and therefore volatility is anticipated to remain high. June consolidated in a declining wedge between $124.00 and $120.00. Somewhere south of $124.00 is where I anticipate June to scratch its way back to.

Feeder Cattle:

Feeders are not anticipated to move back as quickly as what the fats may. This would help considerably in the cost of gains calculations for feed lots. The leeway that stockers have with weights may help them to weather this storm a little better. However, I do not anticipate a return to the contract high. A wave 4 correction is anticipated to bring feeder prices up approximately $3.00 to $4.00 before resuming the down trend for another new low in this decline.
 

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