Spread Betting Livestock | Trading Live Cattle, Lean Hogs, and Feeder Cattle
You may be wondering what it means to spread trade on “livestock”. If you have not studied the futures markets, then you may be unfamiliar with how these financial securities are structured. Using spread trading allows you far easier control over your risk and reward than if you directly traded on the futures markets, but lets you profit just as much.
Taking for example the list of spread trades on the IG Index website, you find under the heading “Livestock” the subheadings Live Cattle, Lean Hogs, and Feeder Cattle, and you can spread bet on any of these. They are the names of standardized contracts which you can trade on the futures markets. The contracts are standardized with regard to quality and quantity, the date in the future and where the goods should be delivered.
Anyone is allowed to buy and sell these futures contracts, even if they are not farmers or manufacturers. Up until the time of delivery, you can get out of the obligation to supply the goods simply by buying back the contract at the price then current. On the other side of the equation, if you bought the contract for livestock, you do not have to receive the goods, but simply sell the contract before the expiration.
Spread betting is one step further removed from that, and you can never be required to supply or take the goods when you spread bet on livestock. You are actually betting on the price of the futures contracts with no connection back to the actual commodities.
Originally futures were set up so that farmers would be assured of a certain price if they invested their money and time in raising animals or growing crops; companies such as cereal manufacturers would take the other side of the contract, and then know exactly how much they had to pay for their raw material to make the cereal in six months time. It made commerce easy, and hedged the risk for both sides.
It still works that way, but is also an opportunity for speculators to make money by buying and selling the contracts in anticipation of prices changing. When you spread bet on livestock futures, you too are speculating on the future changes.
Livestock and other agricultural products can be a little risky to bet on, because they are dependent on circumstances outside of anyone’s control, such as the weather. The weather is one of the most unpredictable elements on the planet and there is no long-term way of forecasting how long the US drought could last for instance. If the weather is bad, a grain crop may be poor, and prices will rise; therefore the price of feed is more expensive and this is reflected in the livestock prices. Conversely a drought could also see a sell-off of cattle as livestock become more expensive to feed. A lack of reserves on the other hand could result in less feed available for livestock. However, this could provide a buying opportunity for investors: if a rise in livestock prices is delayed, investors could buy at a lower level making larger gains.
If you are considering cattle, make sure to take into account typical seasonal variations, and try to anticipate for annual changes. If you have not bet on livestock before, then you should spend some time studying the historic charts to see how the price moves. From this, form a trading plan and make sure that you test it on a demo account before you start trading.
Spread Betting on Livestock
If you are spread betting on a livestock, you have several choices. IG Index allows you to bet on Live Cattle, Lean Hogs, and Feeder Cattle. The current price for a bet on live cattle is 12,846.3 – 12,866.3. If you think that the price is going up, you can place a long or buy bet for £3 per point at 12,866.3. Say the price went up to 13,023.1 – 13,043.1, and you decided to close your bet and collect your winnings. This is how you work out how much you have won.
- Your long spread bet was placed at 12,866.3.
- The bet closed at 13,023.1.
- The difference between these is 13,023.1 less 12,866.3.
- This works out to 156.8 points.
- Your spreadbet was for £3 per point.
- Therefore you won 156.8x£3.
- This works out to £470.40.
Sometimes your bet will go the wrong way, and this does not always mean that you made a mistake, simply that the market had other ideas. Perhaps the price will fall to 12,785.7 – 12,805.7, and you will close your bet to limit your losses.
- Your long spreadbet was placed at 12,866.3.
- The bet closed at 12,785.7.
- The difference between these is 12,866.3 -12,785.7.
- This works out to 80.6 points.
- Your bet was for £3 per point.
- Therefore you lost 80.6 times £3.
- This works out to £241.80.
While you don’t need to know anything about farming to spread bet or even trade futures on livestock, it can help if you have an idea of what can affect production on the farm. Something like a drought or torrential rain, baking or freezing weather, etc. will affect the natural processes and usually impact the price. To the extent these things cannot be foreseen, everyone is in the same position and you need to apply technical analysis to the charts to see what other traders are thinking.
As a second example, suppose you are interested in betting on lean hogs. The current spread betting quote for them is 8848 – 8863. Perhaps this time you will take a short or sell position for £2.50 per point. The short bet goes on at the lower price, which is 8848.
After a time, say that the quote goes down to 8623 – 8638, and you decide to close your trade and collect your winnings. As it is a short bet, it closes on the higher price of 8638.
- Your short bet was placed at 8848.
- You closed your bet at 8638.
- Therefore you gained 8848 less 8638 points.
- This works out to 210 points.
- Your stake was £2.50 per point.
- So you won 210 times £2.50, a total of £525.
Once again, the bet may have gone the wrong way for you, in this case going up, and you close to cut your losses when the price reached 8892 – 8907.
- Your short bet was placed at 8848.
- You closed your bet at 8907.
- Therefore you lost 8907-8848 points.
- This works out to 59 points.
- Your stake was £2.50 per point.
- So you lost 59 times £2.50 which is £147.50.
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