Lean Hogs Options Explained

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Lean Hogs Options Explained

Lean Hogs options are option contracts in which the underlying asset is a lean hogs futures contract.

The holder of a lean hogs option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying lean hogs futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Lean Hogs Option Exchanges

Lean Hogs option contracts are available for trading at Chicago Mercantile Exchange (CME).

CME Lean Hogs option prices are quoted in dollars and cents per pound and their underlying futures are traded in lots of 40000 pounds (18 metric tons) of lean hogs.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
CME Lean Hogs Options 40000 lb
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Lean Hogs call options are purchased by traders who are bullish about lean hogs prices. Traders who believe that lean hogs prices will fall can buy lean hogs put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Lean Hogs Options vs. Lean Hogs Futures

Additional Leverage

Limit Potential Losses

As lean hogs options only grant the right but not the obligation to assume the underlying lean hogs futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

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Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a lean hogs option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

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Lean Hog 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.

Hogs are typically bred twice a year in order to provide a steady flow of production. The gestation period for hogs is 3 1/2 months and the average litter size is 9 piglets. They are usually weaned by 3-4 weeks of age and then fed grains such as oats, corn and wheat to fatten them. Pigs typically gain 3.1 pounds per pound of feed and are often ready for slaughter at 6 months of age. Hogs are usually ready for slaughter at about 254 pounds and yield a dressed carcass weight of around 190 pounds which yields about 89 pounds of lean meat.

Chicago Mercantile Exchange (CME) Lean Hogs futures and lean hog options contracts have undergone considerable improvements. Effective with the February 1997 contract, new and improved specifications, including a new name -Lean Hogs- instead of live hogs make this contract even a more viable hedging tool for pork producers and packers throughout the U.S. Learn More >>>

Are you a lean hog hedger? If so, click here to learn more.

Lean Hogs Options on Futures Contracts Explained

A lean hog 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 a April lean hog $1.00 call option and pay a premium of $1,260.

This means that you bought the right but not the obligation to buy 40,000 pounds of April lean hogs for $1.00 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 lean hog option to hedge your price risk in the physical lean hog market (maybe you are a producer and own a hog farm or you are an end user and own a chain of barbeque restaurants) or you are speculating that lean hog prices will go higher in an attempt to make a profit.

A lean hog 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 lean hog .90 cent put option and pay a premium of $1,800.

This means that you have the right but not the obligation to sell 40,000 pounds of April lean hogs at .90 cents 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 lean hog $1.00 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 feeder 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 lean hog $1.00 call option with 60 days left until expiration. Let’s also assume that the lean hog 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.

Lean Hog Futures and Lean Hog Options
Contract Specifications

Trading Unit
Lean Hog Futures: 40,000 pounds of lean value hog carcasses
Lean Hog Options: One Lean Hogs Futures Contract

Trading Hours
Lean Hog Futures: 9:05 a.m. to 1:00 p.m. LTD (12:00pm) Central Time
Lean Hog Options: 9:05 a.m. To 1:00 p.m. LTD (12:00pm) Central Time

Trading Months
Lean Hog Futures: Feb., April, May, June, July, Aug., Oct., Dec.

Point Description
Lean Hog Futures and Options: 1 point = $.0001 per hundred pounds = $4.00

Contract Listings
Lean Hog Futures: Nine months of February, April, June, July, August, October, and December. Effective 6/4/01, May is eligible.
Lean Hog Options: Eight months of February, April, June, July, August, October, December, and Flex Options. Effective 6/04/01, May is eligible.

Limits
Lean Hog Futures: $0.02/lb, 200 points, $800 see Rule 1602 D

Minimum Price Fluctuation
Lean Hog Futures: 0.00025 = $10.00
Lean Hog Options: 0.00025 = $10.00 Regular, 0.000125 = $5.00 Cab

Lean Hog futures symbol (LH)

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

Lean Hogs Futures and Commodities

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Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices. Trading in these futures often attract plenty of speculative positions. The lean hog is another term for pork that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

  • Ticker Symbol: LH
  • Exchange: CME
  • Trading Hours: 10:05 a.m. to 2:00 PM EST
  • Contract Size: 40,000 pounds
  • Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
  • Price Quote: price per pound
  • Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
  • Last Trading Day: The tenth business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world’s largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.

A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).

Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to a lack of liquidity.

Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.

Corn and Hogs

The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.

One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.

Reports

The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.

Developments Over Recent Years

Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.

In 2020, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2020, the price of lean hog futures moved back to the 60 cents per pound level.

In 2020, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.

With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.

The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.

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