Given the neutral to bearish view from the USDA cattle inventory report, some traders may be able to receive a better price for selling puts if prices decline this week. The premium received would be the maximum potential gain on the trade. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to buy back the short option if the option premium trades at three times the amount received for selling the option originally.

Not to be outdone by its porcine brethren, Live cattle futures have been stampeding higher, rising over $23/cwt. since June of last year. Good demand for beef and the potential for additional exports to South Korea, which has destroyed about 10% of its cattle due to the spread of hoof and mouth disease, have futures prices trading at a premium to the cash market price. Prices have moved of their contract highs the past few sessions, as traders evened-up their positions ahead of this past Friday’s release of the USDA’s semi-annual cattle inventory report, which showed 99.582 million head as of Jan 1st.

This was 1% below last year’s totals, and slightly higher than the average pre-report estimate of a 1.4% decline. Although the numbers were above expectations, this is the fourth year in a row where cattle inventories have fallen. The report is expected to have a bullish influence on deferred Feeder Cattle futures, but may initially pressure near-term Live Cattle futures. However, with the U.S. cattle herd now at 52-year lows, any significant price weakness this week may be met with fresh buying, as the supply outlook appears like it will remain tight again in 2011.

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