Live Cattle Looks Bullish - Update 1

Look at this beautiful confirmation. Made a 114.70-112.75 = 1.95 * $400/pt = $780 move today and a 113.95 - 112.75 = 1.2 * $400/pt = $480 gain on the close for the day.

Yesterday's upper wick, which seems like profit taking, was 113.625 - 112.90 = .725 points.

Today's upper wick was 114.70 - 113.95 = .750 points. Very symmetrical. Not sure its all that suggestive of what will happen next, but the more orderly the price action is the better, in my opinion.

Notice today's open is also the low of the day. That's a bullish sign.

Also notice Stochastics are still in the mid-range, giving us plenty of room to run.

Volume is a little lower, which is reasonable considering we're heading for the Thanksgiving holiday in the USA. But volume is still respectable, based on the chart.

You'd have to say we're nicely on track. However, we could just be retracing the previous AB/CD down leg before reversing and heading back down. We won't know if we're in that temporary retracement or going up to our target until we close above the previous swing high at 115.45.

The unusual length of the time the Live Cattle market will be closed for the holiday has been weighing on me. So I did some analysis on how we might hedge our position and came up with something interesting using options.

I figured out a way to hedge the long Live Cattle position that will limit our loss to $300 instead of $800, assuming our stop is hit, and it only costs $60 of potential profits out of $2000. 

Yesterday (rounding to whole numbers):

Entered at 113

Target 118

Stop 111

Risk=111-113=-2*$400=-$800

Reward=118-113=5*$400/pt=$2000

Today when Feb LE was 114.50, the 118 Call option was selling for $500 with a Delta of 30%.

Our paper gain was 114.50-113=1.5*$400/pt=$600 profit

If LE goes to target, we'd make another 118-114.5=3.5*$400=$1400 profit

If we sell a 118 Call, and use an average Delta of 40%, then we'd lose 114.5-118=-3.5*40% Delta=1.4*$400=-560 loss. And we'd make $500 in premium from selling the option.

Delta's are always about 50% when the underlying is at the Strike Price. Our Strike is 118 which is also our target. So the current Delta is 30% and the Delta at our target is 50%. That's why I used an average Delta of 40%.

So the new trade would be,

Risk: 800-500=$300 loss if stop is hit, instead of $800 with no hedge.

Reward: 600+1400+500-560=$1940 net profit, instead of $2000 if target is hit with no hedge.

So saving $500 in potential losses for a cost of $60 of potential profits.

This seemed like a good idea, so I entered the order to sell a 118 Call for $500. At which point LE immediately started dropping, so the order wasn't filled. So, we'll take another look at the situation tomorrow and decide what to do.