Buying Lean Hogs Put Options to Profit from a Fall in Lean Hogs Prices

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Buying Lean Hogs Put Options to Profit from a Fall in Lean Hogs Prices

The price of Lean Hogs is 46.450 USD (per pound) today.

Will LH price drop / fall?

Yes. The Lean Hogs price may drop from 46.450 USD to 41.764 USD. The change will be -10.0881%.

Will LH price grow / rise / go up?

Will LH price crash?

According to our analysis, this can happen.

How to Make a Fat Profit From Lean Hog Futures

Commodity investors should consider pigging out on lean hogs. A record-breaking drop in global pork production will mean a massive shortfall of meat, which could spark a rally in hog prices of at least 20% by year end.

Market Data Center: Commodities & Futures

“There isn’t enough pork in the word to solve this shortage,” Shawn Hackett, president of Boca Raton, Fla.–based Hackett Financial Advisors, told Barron’s. “Certainly, it can go back and retest these highs we saw earlier the year, and it may not stop there.”

The price of lean hogs could hit $1 per pound or more by year end, up from about 80 cents recently. Prices reached a peak of around 99 cents in April before pulling back, according to Bloomberg data.

Investors looking to profit from the move could buy February-dated futures contracts for lean hogs on the CME futures exchange. Alternatively, they could buy the ETFS Lean Hogs exchange-traded fund (ticker: HOGS.UK), which tracks the price of lean-hog futures contracts.

The problem is that global pork supplies are expected to drop by the largest percentage ever, based on an analysis of data since 1960. This year, world output will be 108 million metric tons, down 4% from 113 million tons in 2020, according to data from the U.S. Department of Agriculture.

The production decline is the result of an outbreak of African swine fever in China, which is the world’s largest supplier and consumer of the meat, and elsewhere. There is no approved vaccine for the disease, which can kill infected pigs within a few days. “For hogs, it’s the equivalent of black death,” says Don Coxe, chairman of Chicago-based financial advisory firm Coxe Advisors.

While the disease is affecting herds across the world, the impact on China matters more than anywhere else. Last year, Chinese production accounted for 48% of global pork output, or 54 million metric tons. This year, China’s hog output will drop by 5.5 million tons, according to the USDA.

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That drop is the direct result of the swine fever. Not only are infected beasts slaughtered and then burned, but the epidemic also has scared farmers into culling their herds.

“China has tended to be reticent about the existence of the disease,” says Coxe. This cagey approach could have panicked farmers wanting to safeguard their investment in the livestock. It isn’t clear what portion of the herd was culled, but Hackett says it could be as high as 35%. In many cases, farmers would have chosen to send the beasts to the abattoir rather than risk them getting infected and becoming worthless.

What are Lean Hogs? – Trading Great Swings with Lean Hog Futures

Many new to trading tend to only look at markets they are familiar with. Most often, that happens to be the index markets and not, for example, lean hogs futures. That’s a pity since there are other markets that offer great opportunities to diversify!

In general, you want to diversify as much as you possibly can so that one market or one strategy isn’t responsible for all your profits. The more markets and strategies you trade, the better prepared you are for market turmoil and black swan events. To be frank, there simply is no reason to stay with one market, when there are so many to choose from!

One great market that is often overlooked, is the lean hogs market. It holds many edges that are worth investigating for your trading. However, the subject of this post is another. The lean hogs futures market has experienced great swings lately, and I thought that it might be interesting to understand why!

In many cases, it’s hard to ascribe price action to certain events, but this time there is one reason that seems to have triggered it all.

What Has Happened?

Take a look at this daily chart of the lean hogs futures market:

Lean hogs futures chart

As you can see, the price has rocketed since the beginning of March, going from slightly below 70$ all the way up to 98$. That’s an increase of over 40%, in just one month! So what’s driving this market?

Well, China, that stands for nearly 50% of the world production of pork meat, has had to make its biggest purchase of US pork meat in nearly two years. The reason is that a massive outbreak of African swine fever has reduced Chinese pork production by as much as 30%, creating a shortfall that needs to be compensated through more imports. China already is a massive buyer of American meat products and consumed nearly half of worldwide pork production in 2020.

The approaching trade deals between China and the U.S could determine the extent of the Chinese increase in meat imports, thus impacting the price of lean hogs. In other words, this is something worth keeping an eye on!

Profiting From Lean Hogs Rally

All major price movements of any market offer great opportunities to make substantial profits or losses. If you have a robust strategy, you might end up on the winning side and make some gains. Here is one strategy of mine that has been very successful in the recent lean hogs rally:

Lean Hogs strategy

As you see, lean hogs futures managed to catch a significant extent of the last month’s swings. First, it followed the market all the way up to the top, exited the market, and managed to reenter right when it was about to turn up again. In the picture below you can see how the last two trades made a significant mark on the equity curve.

Of course, this strategy was lucky and managed to be on the right side of the market. That’s not always the case. Nonetheless, having a good strategy increases your odds of making money from volatility explosions like this one!

Final Words

There are many markets that hold nice opportunities for traders to make money, and the lean hogs futures market is one of them. Many new traders focus too much on their favorite markets and subsequently miss many chances to diversify and achieve higher returns with lower risk. Don’t be one of them! Trade as many markets you can, and you will most likely achieve better results! Diversification is the closest we can ever come to “the holy grail” in trading!

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