Live Cattle/Lean Hog Spread: Liquidate the Short Position

Live Cattle/Lean Hog Spread

The IMC blog entered a hypothetical short position in the December live cattle/lean hog spread at 83.50 (premium cattle) on April 15th. Initially, we were going to risk a close above 90.00 (premium cattle) so that it would take a breakout to new contract highs to knock us out.

After sitting in a trading range for several weeks, the December live cattle/lean hog spread made a breakout to the upside. Today will likely be the third-consecutive day that it closes back above the 84-cent mark as well. This price action argues for a test of the contract highs. Therefore, it may be prudent to go ahead and take a partial loss right here in the hopes that we can reposition at a higher level.

December Live Cattle Lean Hog spread 3-minute

December Live Cattle Lean Hog spread 3-minute

Despite the recent bounce, it is important to keep the big picture in mind. Both the spread and the ratio between live cattle and lean hogs are at high levels that are rare by historical standards. In the past, both the spread and the ratio have always turned back down and gone to levels that are less than half of where they are now. Therefore, we are still very excited about the short side of this trade. The current liquidation is just a little bit of fine-tuning.

Trade Strategy:

Buy back the one short 40,000 lb. December live cattle contract and simultaneously sell the one 40,000 lb. December lean hog contract at a spread of 85.75 or better.

However, let’s keep the ‘add-on’ order working to sell one 40,000 lb. December live cattle contract and simultaneously buy one 40,000 lb. December lean hog contract if the spread closes below 80.00 (premium cattle). If filled, risk a two-day close .50 points above the highest price that follows the April low. That way, we have a setup that gets us back in the spread in the event that our current bailout is ill-timed.

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