The last Cattle of Feed report by the USDA was the first clearly bullish news seen by the meat complex in months. The upfront months saw several limit up days. The further out months, like August and September, saw the gap between the months grow. This spike has created an opportunity for a feeder futures bear spread.
The August vs September feeder cattle spread is currently trading around 2.10. While it is certainly possible for the spread to go higher, the cattle complex should settle down as there is still a clear expansion of the herd.
History is on our side as well with this spread. The last 15 years of charts, shown below, indicates the spread rarely gets above the $2 mark.
Trade Details: Feeder Cattle Spread
Futures Contracts: Short Aug ’16 Feeders vs Long Sep ’16 Feeders
Trade Dates: No specific dates but avoid carrying it into August
Entry Target: 2.00+ (adjust based on your personal objectives and risk tolerance)
Margin: $1,700 (check with the CME for changes in margin)