Analysis of Live Cattle Futures Spread for March 2016

In this article we will look at the futures spread, which SeasonAlgo platform provides as a futures spread for March 2016. This is a calendar spread of Live Cattle LEZ16-LEV16.

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As you know, the free spreads published by the SeasonAlgo platform are always prepared well in advance. That is why it is always necessary to perform a careful analysis of the current status of the spread, especially before the beginning of the seasonal window.

Let us have a look at this spread now. The SeasonAlgo suggests to enter the trading positions on 1st March and to exit the position on 1st June 2016. It is the spread with a relatively long seasonal window. Thus, if the spread seasonal uptrend did not start immediately son, there is still a good opportunity to enter the trading positions later if there would be an entry signal.

Let us now perform a more detailed analysis of the spread. The backtest indicates that over the last 5 years the spread was 100% profitable and over the past 10 years there was only a single losing trade in 2008. There is a low volatility because this is a narrow legs spread. The SeasonAlgo recommends to risk approximately $270 per contract. This means that in case with the basic account of $10.000 it is possible to enter a position with approximately two contacts. This spread has relatively high RRR, which is 3.63 on the ten-year history. Over the last ten years the average profit per contract was $496. The average profit could be reached in 50% of trades. Thus, the strategy appears relatively stable.

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However, the major problem of this spread is that this year it does not correlate with any of seasonal patterns. Moreover, there is a high negative correlation with each of them. For instance, there is -84% between the current year spread and the 10 years seasonal pattern. It means that this year seasonality of this spread is very poor. Also, the correlation amongst each of seasonal patterns, especially within the seasonal window, is lower than what we usually search for our trades. When looking into history, we found a spread of 1996, which showed a very similar pattern as the current year spread and was even traded at almost identical price levels. In 1996 the trade resulted in a loss of $520 per contract. From this point of view, we consider this spread risky.

A more positive characteristic of this spread is the fact that this year the spread is traded at very low prices which means that there is potential for spread price increase during the seasonal window. However, we must not forget that the seasonality of this year spread is strongly disturbed and there is a risk that the price will decline, which implies the development of strongly correlating spread of 1996.

Another risk factor of the spread is that LEZ16 does not have sufficient liquidity which again speaks against entering the trading position.

The spread began to decline in March and last week it oscillated within a price channel. It now may form a double or even triple bottom pattern and may start rising. However, if you were about to enter the trading position, extra caution is recommended. Given the seasonality of this year being very poor as well as low liquidity, it is recommended not to trade this spread at all or to wait for several strong signals confirming the uptrend. By Friday, March 11, 2016 no entry signal occurred.

We shall get back to this spread next month again to analyze its current development.

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