Well that time of the month is nearing in the cattle futures pit once again. It’s almost time once again for the Goldman roll. The roll should commence in live cattle futures around the middle of next week. That’s the 7th or 8th of November in case you don’t have a calendar nearby. Typically, the Goldman roll is a 4 to 5 day affair.
So how can one take possible take advantage of the impact this unwinding has on prices?
Below is one idea you may want to consider for the CME Live Cattle Futures contract:
Long December 2006 Live Cattle / Short February 2007 Live Cattle.
Look to initiate this spread from (-2.75) through (-3.50). It can get ugly on the settle at times, so to trade this spread you must have the fortitude to withstand these “distorted”
This spread settled on Wednesday November 01, 2006 at (-) 3.12 under.
CME Live Cattle Futures Settlement Prices for Wednesday November 01, 2006 are as follows:
December settled at 87.55
February settled at: 90.67
Spread = (-) 3.12 under
Historically speaking, during strong years this spread has traded as high as around +0.75 over. If you were to look at all years combined this spread averages around (-) 1.00 under. Based on this fact alone the current Long December / Short February spread is undervalued. But do keep in mind that what is cheap can get cheaper.
Look to take advantage of major selling in the December and major buying in February, this is commonly referred to as unwinding for those who may be new to futures trading, as the roll moves into gear. This spread could potentially widen out anywhere from the present level of around -2.80 to as wide as -3.25 through -3.50 during the roll.
However, once the roll is completed I will be looking for this spread to revert back to around the (-) 1.50 under area in rather short order barring any type of weather related event such as a blizzard in South Kansas. The probabilities of that happening are around 1 out of 12.
For purposes of risk management a potential exit area can be pegged around the (-) 4.00 under area. However, this would only be for a core position. If you add to the core position in the (-) 3.25 through (-) 3.50 area you can move your targeted money management exit area past the (-) 4.00 area.
Overview:
The Goldman roll can and does exaggerate market prices to extremes. However, once the roll is finished the market typically returns reverts back to a more “normal” pricing. We want to attempt to capitalize on this exaggeration of prices by entering into a long Dec. / Short Feb. spread.
Look to initiate a core position at present levels. However, if this spread should get into the -3.25 through -3.50 area you want to consider getting more aggressive in this area by adding to the core position.
For more information:
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Aaron Trading is a fully licensed and registered commodity futures broker. Additionally, foreign exchange trading is also available via our institutional foreign exchange platforms.
Disclaimer: There is a substantial risk of loss in trading commodity futures and options trading. Under no circumstances should you ever use scarce funds to engage in any type of speculation including commodity futures and options. Past performance in not indicative of future results. The statistical data in this report were obtained from sources considered to be reliable but no guarantee is given as to the accuracy.
