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This may sound silly, but how do you determine whether these futures are underpriced? I am short puts on live cattle as well based on a recent recommendtion by Carley.
From reading some of the past comments you've posted, it appears that a large part of the discussion is centered around the correlation between cash cattle and futures, and when that discount/premium gets much more than whjat it has been historically, one could look into opening a trade.
My question is whether you'd ever view this the other way around. As in, can it be that he cash cattle itself is under/overpriced? Rather than assuming that cash cattle is traded correctly? Based on my very limited understanding of the meats, future pricing is based in large part to the placement of feeder cattle on feed and therefore get an idea with regards to what the cutout supply will look like at that time, compared to projected/historic/seasonal demand patterns at that time.
Just curious whether you had any view on this. If I'm totally off my base please let me know. Thanks!
For many years future prices followed cash prices rather reliably. If you had an idea were cash prices should be when the future expires, and futures were over- or undervalued compared to this price, you could sell puts or calls, and make money. The only remaining problem were sudden production problems, eg. deseases.
This correlation seems to have changed about a year ago, and it took me some time to realize it. (If you have a look at my older entries in this thread you will see a number of losses for cattle options.) I do not know the reason. Some People argue that it has to do with the future contract. Others have the opinion that cash price is determined based on a very small amount of cattle. May be, but these things have not changed recently. But it is obvious that the difference between cash and cattle price is not as reliable as some years ago.
Cattle limit down today. Looking at the report, I'm not sure I see the reason for a massive downward move like this. Anyone has any insights to understanding this much of bearishness?
