Feeder Cattle/Corn Spread: Liquidate The Position For Now

Feeder Cattle/Corn Spread

The IMC blog initiated a hypothetical short position in the April feeder/May corn (x6) spread at +$1,000 (premium feeders) on November 19th. An ‘add-on’ position was entered at -$7,512.50 (premium corn) on December 9th.

The Last Trading Day for the April feeder contract and the First Notice Day for the May corn contract both occur next Thursday. Therefore, traders will need to exit the spread position.

April Feeders May Corn (x6) spread daily

April Feeders May Corn (x6) spread daily

We are now monitoring the summer delivery contracts for new trading opportunities. The ratio between the value of an August feeder contract and the value of a July corn contract is at 5.78:1 today. Recall that the feeder/corn ratio has always been an outstanding short sale opportunity whenever it has reached 4.8:1 or higher. Historically, the ratio has always reversed and dropped back down to 3:1 or lower. Therefore, it is still a prime candidate for trading on the short side.

August Feeders July Corn ratio daily

August Feeders July Corn ratio daily

At the moment, the August feeder/July corn (x6) spread has recouped about half of the decline from the October high to the December lows. It would be nice to see the spread reach the Fibonacci .618 retracement of this range at -$1,557. At that level, the ratio would be awfully close to 6:1. A reversal off this level could present a lucrative reentry setup.

August Feeders July Corn (x6) spread daily

August Feeders July Corn (x6) spread daily

Conversely, a break below the similar March 25th reaction low at -$12,025 and the April 20th low at -$12,187.50 could indicate that the August feeder/July corn (x6) spread is rolling over again. Let’s watch this spread close and see what transpires.

Trade Strategy:

On the short April feeder/May corn (x6) spread entered at +$1,000 (premium feeders) on November 19th and the ‘add-on’ position entered at -$7,512.50 (premium corn) on December 9th, exit right here at -$4,050 or better. This will yield a profit of +$5,050 on the initial position and a loss of -$3,462.50 on the ‘add-on’ position for a net profit of +$1,587.50 on the trade (not including commissions).

Also, cancel the setup to add another on a close below the December low of -$20,550 (premium corn).

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