futures up -steers down

[HerefordSire]

denoginnizer

You can deliver anywhere, just know your what your basis is normally at where ever you want to sell. The reason you can deliver anywhere is because cattle CAN NOT be used to settle a feeder cattle contract. They don't want your cattle they only want your cash.

Correct. Feeder cattle are cash settled. So the difference is the price where you purchase and or liquidate relative to the contract price.

Feeder Cattle futures are a cash-settled 50,000 pound contract

http://www.cmegroup.com/trading/commodi ... about.html

 

[HerefordSire]

Herefordsire

If you own the underlying commodity used to cover the contract you have only paid margin calls or been paid margin calls.

Not correct. A margin call is issued when an asset is borrowed and the market moves against you towards an out of the money direction. The broker dealer loans you the money and wants to be guaranteed not to lose money. It is a self regulated industry so the percentage when a margin call is issued is around 25-30% or according to industry guidelines. I believe what you are referring to is a premium of a contract.

No profit will be realized above the original contract price.

It depends upon the investment strategy. Some strategies have limited losses and unlimited gains while others can have unlimited losses and limited gains. If the poster implemented a sell first and owned the underlying cattle, he would be in a covered position which implies limited loss and unlimited gain.

You may win on 1, but you lose on the other.
The only way they will realize profit as you describe will be thru speculating without owning the underlying commodity.

Not true. Contracts are usually used for hedging positions. They can be used like an insurance contract. In this example, there would be no speculating because he would be covered. He would be speculating if he owned the cattle without a sale contract at the same time.

Advising these people to play the futures market is suicide for them.

I am not advising anyone to do anything.

They might get lucky they might not. They just as well sell the cattle and go to the casino with the cash.

There is a big difference of an investment hedge with cattle contracts and a casino.

We all know how stupid that is. CME has some great tools to insure profit for these farmers and ranchers but the futures market isn't one of them.

Yes it is, just so you are not naked (not covered). If you are naked, you are speculating.

You do realize that considering the question asked by denoginnizer, about cattle feeder futures going up, and the feeder cattle going down, and if that situation continues, that your advice about selling a feeder cattle futures contract and buying feeder cattle, you have now gotten your shorts cleaned twice?

It doesn't work that way. If he is holding a sale contract and the market goes to zero, he can buy a contract to cover his position and he makes the difference. If the market goes up, the cattle contract rises along with the value of his actual cattle so the maximum loss if predetermined and his profit is unlimited.

 

[HerefordSire]

Could you share some of them and perhaps elaborate?

This is intended to get you going.

(1) Figure out a strategy. For example, will you own 50,000 pounds six months from now? Now?

(2) Figure your out your liquidation time. Six months from now? Next month? etc.

I will help direct you if you help me understand your position.

 

[HerefordSire]

I should add.....very few investors actually deliver cattle represented by contracts. If they are in the money or out of the money, they simply cover the position the contract represents.

Not much different then Billy Solestes or Eddie Antar (Crazy Eddie)

I didn't know who they were so I looked one up.

http://en.wikipedia.org/wiki/Crazy_Eddie

 

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Herefordsire


You sold a $104 contract you bought $88.50 cash cattle. Futures continue to rise, cash cattle continue to fall.
Aug 27 rolls around, for the sake of discussion Aug settle at $112. You owe $8 to clearing house to settle contract. Your cash cattle has declined, you have now lost money there as well. This is the senerio that denoginnizer is seeing in his area.
I'm sure this works on wall street but not in the real world.
Had the cash market followed the futures, you would have paid margin calls until settlement. You would have recaptured the loss realized thru margin calls, thru higher priced cash cattle thus offsetting each other and you would be right back at $104 for your contract.

 

[options]

loads of 800 pound grade 1 and 2 steers this week were 88.50. Herford shire given these numbers can you give me a scenario of my expected gain or loss ?

If you sold first for 104.00 for example, and you bought for 88.50 for example, then your gross profit would be ((104 - 88.5) * Quantity * CWT) less contract premiums and delivery fees if any, minus any feed, board, insurance in between. You would be in a covered position.

This is the most insane thing I have ever read, Stop misleading these people.

That $15.50 cwt is not profit it is BASIS. Come Aug 27 when it comes time to settle your futures contract you sold, you will also have BASIS. If that basis is $19 you have lost $1750 dollars. If that basis is $13 you have made $1250. None of this profit or loss has taken into consideration feed, board, insurance or any kind of expense. Long way from the $7750 you thought you had made.

These fine men and women don't need the help of a speculator trading basis, they need advice on how to market the product they raise for the highest return. These people are hard working ranchers, not speculators. My continued success depends upon their continued success. There is a reason the CBOT has got so far out of line over the last couple years. SPECULATORS.

Speculators have driven more ranchers, farmers, feedlots, ethanol plants, and grain elevators out of business in the last year than you can even imagine.

 

[HerefordSire]

Herefordsire


You sold a $104 contract you bought $88.50 cash cattle. Futures continue to rise, cash cattle continue to fall.
Aug 27 rolls around, for the sake of discussion Aug settle at $112. You owe $8 to clearing house to settle contract. Your cash cattle has declined, you have now lost money there as well. This is the senerio that denoginnizer is seeing in his area.
I'm sure this works on wall street but not in the real world.
Had the cash market followed the futures, you would have paid margin calls until settlement. You would have recaptured the loss realized thru margin calls, thru higher priced cash cattle thus offsetting each other and you would be right back at $104 for your contract.

If the market moves against him while holding a short contract, chances are the market of his actual cattle will go up in price also. The exception would be minor fluctuations but never for extended periods of time as they will gravitate together, thereby the spread between the two, has a historic maximum and minimum. If in the short term, for some strange reason the prices don't move in tandem positively, as appears to be right now based upon heresay, then he could simply cover the position and simultaneously open another position further out in time and transfer the cost basis. He would always be covered in any case.

A margin call is issued, or not issued, as in a short position, based upon the total equity in your account relative to the amount borrowed. If the contract moves against you for some reason, such as being in a short position, it doesn't mean there are not enough assets in the account to make up the margin maintenance.

 

[HerefordSire]

loads of 800 pound grade 1 and 2 steers this week were 88.50. Herford shire given these numbers can you give me a scenario of my expected gain or loss ?

If you sold first for 104.00 for example, and you bought for 88.50 for example, then your gross profit would be ((104 - 88.5) * Quantity * CWT) less contract premiums and delivery fees if any, minus any feed, board, insurance in between. You would be in a covered position.

This is the most insane thing I have ever read, Stop misleading these people.

That $15.50 cwt is not profit it is BASIS. Come Aug 27 when it comes time to settle your futures contract you sold, you will also have BASIS. If that basis is $19 you have lost $1750 dollars. If that basis is $13 you have made $1250. None of this profit or loss has taken into consideration feed, board, insurance or any kind of expense. Long way from the $7750 you thought you had made.

These fine men and women don't need the help of a speculator trading basis, they need advice on how to market the product they raise for the highest return. These people are hard working ranchers, not speculators. My continued success depends upon their continued success. There is a reason the CBOT has got so far out of line over the last couple years. SPECULATORS.

Speculators have driven more ranchers, farmers, feedlots, ethanol plants, and grain elevators out of business in the last year than you can even imagine.

I didn't write profit, I wrote gross profit, a spread locked in at the time of the transaction, less fees.

He would not be in a speculative position because he would be covered with his cattle. He would be in a speculative position if he didn't have a maximum loss as in the case if he didn't have a contract at all and he just held the actual cattle.

 

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Herefordsire

You are a basis trader. Pure speculator. You only gain or loss will be derived from a change in basis. You can put whatever color paint on it you want. You are purely speculating. Ranchers need a gauranteed bottom line, speculating isn't it.

 

[options]

Herefordsire


You sold a $104 contract you bought $88.50 cash cattle. Futures continue to rise, cash cattle continue to fall.
Aug 27 rolls around, for the sake of discussion Aug settle at $112. You owe $8 to clearing house to settle contract. Your cash cattle has declined, you have now lost money there as well. This is the senerio that denoginnizer is seeing in his area.
I'm sure this works on wall street but not in the real world.
Had the cash market followed the futures, you would have paid margin calls until settlement. You would have recaptured the loss realized thru margin calls, thru higher priced cash cattle thus offsetting each other and you would be right back at $104 for your contract.

If the market moves against him while holding a short contract, chances are the market of his actual cattle will go up in price also. The exception would be minor fluctuations but never for extended periods of time as they will gravitate together, thereby the spread between the two, has a historic maximum and minimum. If in the short term, for some strange reason the prices don't move in tandem positively, as appears to be right now based upon heresay, then he could simply cover the position and simultaneously open another position further out in time and transfer the cost basis. He would always be covered in any case.

A margin call is issued, or not issued, as in a short position, based upon the total equity in your account relative to the amount borrowed. If the contract moves against you for some reason, such as being in a short position, it doesn't mean there are not enough assets in the account to make up the margin maintenance.

Herefordsire

You will never be able to use cattle to cover a feeder cattle contract. You will need cash to settle that contract. Yes you can sell the cattle for cash to cover contract, however the cash market is different from the futures market a term called basis. So you are incorrect when you say he is covered, because he isn't, a wider basis equals all cattle sold and money out of back pocket to cover contract. Basis varies throughout the country on any given day there can be a spread of $8 on the very same cattle. This isn't oil, where a barrel of oil is a barrel of oil whether physical or futures contract. Trading living commodities are an entirely different ball game one you may not fully understand.

Selling another feeder contract at $112 and hoping the market goes back down to $104 might work. But what do you do about the live cattle you have lost money on? You might want to stick to trading dead stock rather than live stock.