Volume Surged Higher in LC Puts
By Dennis Smith
Follow me on Twitter @denniscattle
Tuesday November 26, 2019
Packers are booked for the week so consider it very unlikely that cash will trade higher. They’ve proven that they’ll not bid against each other with numbers this large, regardless of margins….it’s just not going to happen. Keep in mind, however, the hog & pig report indicated that numbers would indeed peak and drop off toward the end of November. Kept for market numbers went from 105% down to 102% in the two lighter weight categories. A drop of 3% in butcher supplies would change things in a hurry in the face of current demand considerations. The FAS, finally, issued a FINAL RULE stipulating that hog carcasses must be considered muscle cuts and reported for export in the weekly data. I feel very confident that Smithfield has been cheating on this issue since June. The rule went into effect as of yesterday meaning the weekly export report next week could be the first honest report since the ASF story broke. Yesterday was a light volume selloff, reported at less than 40,000 with open interest rising by 1,700. There’s talk that a phase one trade deal is getting close. I’ll believe it when I see it. For the hog market the rolling back of tariffs is the most significant part of a deal. Recommend bull call spreads to have laying in the weeds. If/when we get information that butcher numbers are about to decline we may enter into the Feb/Apr bull spread.
The pop in LC and FC futures was not dictated by the on-feed report but was stimulated by the weather forecast. Volume in LC was 77,000 with open interest rising by nearly 5,700. Those are fairly bullish indicators but I’m highly suspect. Frankly, I’m just not convinced the downward correction is complete. I’m not the only one. Volume yesterday in LC puts was 9,600 compared to 2,800 calls. Large volume was reported in the Feb 118 puts and in the Dec 116 and 114 puts. Dec options, by the way, expire in 11 days on Dec 6th. The show list is estimated at 249,500 compared to 251,000 last week and 231,300 last year. Despite the smaller list numbers are a touch larger this week in the south. Last week’s negotiated volume was large at 106,000. This is the largest since the fire occurred in early August. The cash steer price from last week, at $1.16, is the highest cash price going clear back to May. Beef is headed lower according to my sources. Look for selling to likely develop today.
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