The nearest spread between live cattle and lean hogs (LEJ15-HEJ15) was formerly considered wide at levels above 30c. It’s trading above 100c right now and still rising. This situation is unsustainable from the long term perspective. It’s only a matter of time before these markets at least partially converge. The profit potential is great, but timing the entry is like catching a falling knife.
Rolling the trade into a more distant expiration is complicated by extreme contango in hogs (blue vertical line in the LN histogram) and strong backwardation in cattle (blue vertical line in LC histogram) – both effectively act against any short cattle & long hogs trade.
Given the high risk, I would personally consider using options on futures to trade this idea. I would choose the August expiration and create two vertical spreads. One using call options on cattle and the other using put options on hogs. That would mitigate my risk while allowing me to exploit this unique market divergence.
If you trade Lumber futures, you might have noticed that no new contracts have been...Read more
More than a week ago, I posted this cryptic tweet. Although it was about gold,...Read more
We saved many of you from the bear market last year. Of course, everybody now...Read more
Is there anything exciting about interest rates? They are boring and trade through complex derivatives...Read more