Live Cattle/Lean Hog Spread
The IMC blog was working a hypothetical order to sell the December live cattle/lean hog spread on a bounce to 83.50 (premium cattle). This happened today. The 40,000 lb. December live cattle contract would have been sold short at approximately 151.05 and the 40,000 lb. December lean hog contract would have been purchased at approximately 67.55.
This initial exit plan is to bail out on a two-consecutive day close above 90.00 (premium cattle). The spread would have to make a sustained breakout to new contract highs to knock the position out.
The December live cattle/lean hog spread ended the day at 2.24:1. This is quite extreme. History indicates that the ratio should go back down to just half this level.
The spread is an even bigger outlier. Historically, the live cattle/lean hog spread has always gone back below 20.00 (premium cattle) after a big run. If this happens to the December spread it would knock off a whopping three-quarters of the current price premium. Therefore, aggressive spread traders should be watching for setups to add to short positions on the way down.