Open Interest in Apr LH Calls Higher
On the sharply higher trade in hogs yesterday and the higher close, volume was just moderate at 48.7k with open interest down 2,366. Shorts were running for cover in Apr and Jun. I noticed a large increase in Apr call open interest, rising by 1,639. So, we weren’t the only ones buying Apr calls yesterday. There was nothing fancy to discuss in cash and cutout yesterday, so the market is anticipating positive developments. The 640-report issued yesterday, outlining pork sold for export outside of Canada and Mexico was decent volume (721 loads) and the report showed a large increase in ham loads and a sharp decrease in variety meat loads. Could this possibly indicate that China is in the U.S. pork market for muscle cuts? We’ll find out Thursday when the weekly export data is released. The hog & pig comes out Thursday afternoon and the trade is anticipating some expansion in the U.S. herd which I find incredibly hard to believe. My outlook is mixed early but higher into the close. No new trade rec. The calls we bought yesterday for 40 points settled at 57.
- Buy Apr LH 81 calls at 40 points or lower. (filled on yesterday’s open)
Open interest in LC futures on the surge higher yesterday was down 677 cars. Volume of trade was moderate at 64.6k. Total LC open interest stands at 305,821, nearly even with OI from one year ago but down more than 50k from the recent high. Funds, managed money have liquidated large positions recently. Hedgers were active in the Aug puts yesterday with OI here up 970 and specifically the Aug 150p was up 374. I suspect some bankers are forcing someone to buy these puts against cattle. The feeder index was quoted at 19124, up 2.39. Impressive stuff is happening all across the nation in feeder cattle auctions. Prices for replacements, especially light weight calves are shooting sharply higher. The move yesterday in FC, especially May, was impressive. The evening wire outlined a new bullish three-way risk reversal in Jun LC options. Now that it appears the outside markets have stabilized, I’m not expecting the LC to pull back but shoot higher. Look for a mixed early trade followed by another surge higher. The beef and cattle fundamentals are bullish. Consider the following and I strongly recommend having this order working BEFORE the opening bell.
- Buy Jun LC 160c/164c/154p at 25 points or less. ($100 premium outlay). The initial margin is $1,100.
The biggest concern at the moment is the lack of rain in the forecast for SW Kansas, W. OK, and the TX panhandle. It appears to me that wheat is poised to challenge resistance which I’ll define as 720 in the July contract. Near-term support is yesterday’s low at 692. Moisture in the Corn Belt has improved dramatically going into the planting season. My plan is to step into Sep corn put spreads on a rally during Apr. Regarding wheat, funds, managed money were short more than 86,000 cars as of last Tuesday. Without rain in KS, soon, they may be forced to cover a large portion of these shorts. There’s a seasonal low in July wheat due at the end of this week. Consider the following trade recommendation.
- Establish the July wheat 720c/820c/660p paying 5 cents or less. The initial margin to hold this risk reversal is $1,900. Spec margin on wheat is $3,080.
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