Buying Live Cattle Put Options to Profit from a Fall in Live Cattle Prices

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Contents

Buying Live Cattle Put Options to Profit from a Fall in Live Cattle Prices

If you are bearish on live cattle, you can profit from a fall in live cattle price by buying (going long) live cattle put options.

Example: Long Live Cattle Put Option

You observed that the near-month CME Live Cattle futures contract is trading at the price of USD 0.8445 per pound. A CME Live Cattle put option with the same expiration month and a nearby strike price of USD 0.8400 is being priced at USD 0.0600/lb. Since each underlying CME Live Cattle futures contract represents 40,000 pounds of live cattle, the premium you need to pay to own the put option is USD 2,400.

Assuming that by option expiration day, the price of the underlying live cattle futures has fallen by 15% and is now trading at USD 0.7178 per pound. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying live cattle futures at the strike price of USD 0.8400. In other words, it also means that you get to sell 40,000 pounds of live cattle at USD 0.8400/lb on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying live cattle futures at the market price of USD 0.7178 per pound, resulting in a gain of USD 0.1222/lb. Since each CME Live Cattle put option covers 40,000 pounds of live cattle, gain from the long put position is USD 4,888. Deducting the initial premium of USD 2,400 you paid to purchase the put option, your net profit from the long put strategy will come to USD 2,488.

Long Live Cattle Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 0.8400/lb – USD 0.7178/lb) x 40000 lb
= USD 4,888
Investment = Initial Premium Paid
= USD 2,400
Net Profit = Gain from Option Exercise – Investment
= USD 4,888 – USD 2,400
= USD 2,488
Return on Investment = 104%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the live cattle option sale will be equal to it’s intrinsic value.

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Feeder Cattle Put Options to Profit from a Fall in Feeder Cattle Prices

If you are bearish on feeder cattle, you can profit from a fall in feeder cattle price by buying (going long) feeder cattle put options.

Example: Long Feeder Cattle Put Option

You observed that the near-month CME Feeder Cattle futures contract is trading at the price of USD 0.9520 per pound. A CME Feeder Cattle put option with the same expiration month and a nearby strike price of USD 0.9500 is being priced at USD 0.0600/lb. Since each underlying CME Feeder Cattle futures contract represents 50,000 pounds of feeder cattle, the premium you need to pay to own the put option is USD 3,000.

Assuming that by option expiration day, the price of the underlying feeder cattle futures has fallen by 15% and is now trading at USD 0.8092 per pound. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying feeder cattle futures at the strike price of USD 0.9500. In other words, it also means that you get to sell 50,000 pounds of feeder cattle at USD 0.9500/lb on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying feeder cattle futures at the market price of USD 0.8092 per pound, resulting in a gain of USD 0.1408/lb. Since each CME Feeder Cattle put option covers 50,000 pounds of feeder cattle, gain from the long put position is USD 7,040. Deducting the initial premium of USD 3,000 you paid to purchase the put option, your net profit from the long put strategy will come to USD 4,040.

Long Feeder Cattle Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 0.9500/lb – USD 0.8092/lb) x 50000 lb
= USD 7,040
Investment = Initial Premium Paid
= USD 3,000
Net Profit = Gain from Option Exercise – Investment
= USD 7,040 – USD 3,000
= USD 4,040
Return on Investment = 135%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the feeder cattle option sale will be equal to it’s intrinsic value.

Learn More About Feeder Cattle Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Live Cattle Futures and Options Market Trading

*The information contained within this webpage comes from sources believed to be reliable. No guarantees are being made to the content’s accuracy or completeness.

The Beef Cycle

The beef cycle typically begins when ranchers breed their cattle in the summer which produces calves in the spring. The gestation period is 9 months. These calves are weaned from the mother after 6-8 months and are moved to a stocker operation where they spend 6-10 months and grow to near full size. When they reach 600-800 pounds they are typically sent to a feedlot and become feeder cattle. The animals are considered to have reached full weight at and are ready for slaughter at around 1200 pounds.

Many people often ask, what is the difference between feeder cattle and live cattle. Live cattle reflects the total current supply and demand for fed cattle, competing meats and feed grains along with long term cyclical patterns for meat supply and demand. The Chicago Mercantile Exchange (CME) broke the mold of traditional futures markets, in the mid-1960’s by introducing a futures contract on a non-storable commodity – live cattle. The Live Cattle futures contract has undergone significant changes. Each of these changes has enhanced the usefulness of the live cattle futures and options contract in various risk management programs implemented by livestock producers and consumers to help them hedge price risk exposure. Learn More >>>

Live Cattle Futures and Options Quick Facts

40,000 lb contract size

each once cent move equals $400

trades Feb., April, June, Aug., Oct., Dec.

Live cattle futures symbol (LC)

Here is the cattle brochure courtesy of the CME Group.

These tools have enabled cattle producers who use them to manage their risk more effectively. CME continues to work with the cattle industry to meet producers’ changing needs by improving these live cattle futures contracts. Today the live cattle future contract and the feeder cattle future contracts have increased their trading volumes considerably to become two of the premiere contracts in the meat future sector.

Are you a live cattle hedger? If so, click here to learn more.

Live Cattle Options on Futures Contracts Explained

A live cattle call option gives the purchaser the right but not the obligation to purchase the underlying futures contract for a specific time period and a specific price (strike price). Let’s say that you wanted to purchase an April live cattle $1.56 call option and pay a premium of $1,900.

This means that you bought the right but not the obligation to buy 40,000 pounds of April live cattle for $1.56 per pound. Of course, very few options are bought for the purpose of taking delivery but that is one potential outcome. Chances are that you either bought the live cattle option to hedge your price risk in the physical live cattle market (you may be a producer like a rancher or you may be a consumer like a chain of steak houses) or you are speculating that live cattle prices will go higher in an attempt to make a profit.

A live cattle put option gives the purchaser the right but not the obligation to sell the underlying futures contract for a specific time period and a specific price. Let’s say that you wanted to buy an April live cattle $1.40 put option and pay a premium of $1,560.

This means that you have the right but not the obligation to sell 40,000 pounds of April live cattle at $1.40 per pound.

What is the delta factor?

The delta factor of an option represents the estimated percentage of change an option will receive based on the movements in the underlying futures contract.

Let’s assume the April live cattle $1.56 call option above has a 30% delta factor. This means that if the underlying futures contract were to rally by $1,000, then the call option would accrue by approximately $300 or 30% of $1,000 in the live cattle futures contract.

What is theta?

Options are wasting assets which means that they lose value as time passes. The theta of an option is the measure of time decay.

Let’s assume that you bought an April live cattle $1.56 call option with 60 days left until expiration. Let’s also assume that the live cattle futures prices have moved very little over the last month and are exactly the same price 30 days later. Your option will have lost 30 days worth of time and therefore will be worth less today that it was when it had 60 days left until expiration.

Vega is a measure of the implied volatility of an option contract as it relates to its underlying futures contract. For instance, if the underlying futures contract is extremely volatile then the implied volatility of the options of that futures contract will be affected.

In a high implied volatility environment option premiums tend to expand. Conversely, in a low implied volatility environment the option premiums tend to decrease.

*Contract information changes from time to time. Please click here to see the most recent contract specifications and click here for the most recent trading hours.

Live Cattle Futures and Live Cattle Options
Contract Specifications

Trading Unit
Live Cattle Futures: 40,000 lbs. of 55% choice, 45% select grade live steers
Live Cattle Options: One Live Cattle Futures Contract
Feeder Cattle Futures: 50,000 lbs. of 700 to 849 lb. Medium Frame #1 and Medium and Large Frame #1 feeder steers
Feeder Cattle Options: One Feeder Cattle Futures Contract

Trading Hours
Futures: 9:05 a.m. – 1:00 p.m. LTD (12:00p.m.) Central Time
Options: 9:05 a.m. – 1:02 p.m. LTD (12:00p.m.) Central Time

Trading Months
Live Cattle Futures: Feb, Apr, Jun, Aug, Oct, Dec, Seven months in the February Bi-monthly Cycle
Feeder Cattle Futures: Jan, Mar, Apr, May, Aug, Sept, Oct, and Nov, Eight months listed at a time Live Cattle Options: Feb, Apr, Jun, Aug, Oct, Dec, Serial Months
Flex Options: Six months in Feb Bi-monthly cycle. One serial month
Feeder Cattle Options: Jan, Mar, Apr, May, Aug, Sep, Oct, Nov.
Flex Options: Eight options months listed

Point Description
Live Cattle Futures and Options: 1 point = $.0001 per pound = $4.00
Feeder Futures and Options: 1 point = $.0001 per pound = $5.00

Minimum Price Fluctuation
Live Cattle Futures and Options-regular: 0.00025 = $10.00
Feeder Cattle Futures and Options-regular: 0.00025 = $12.50
Live Cattle Options-cab: 0.000125 = $5.00
Feeder Cattle Options-cab: 0.000125 = $6.25

Options Strike Prices
Live Cattle Options: Cents per pound. First two months only- $0.01 intervals e.g. $0.76, $0.77, $0.78. All other months $0.02 intervals e.g. $0.76, $0.78;
Serial Options – $0.01 intervals. Flex Options are listed in intervals of $0.0025.
Feeder Cattle Options: Cents per pound. First two months only- $0.01 intervals, $0.60, $0.61, $062 etc. All other months- $0.02 intervals, $0.62, $0.64, $0.66, etc.
for spot month, $0.005 intervals, $0.605, $0.610, $0.615, etc.
Flex Options are listed in intervals of $0.0025

Product Code
Live Cattle Futures Symbol: LC
Feeder Cattle Futures Symbol: FC

**Click Here Now! for actual live cattle futures and options quotes, prices, expirations, charts .

To learn more about the meat futures visit feeder cattle futures, lean hog futures and porkbelly futures.

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