Feeder Cattle Options Explained

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Contents

Feeder Cattle Options Explained

Feeder Cattle options are option contracts in which the underlying asset is a feeder cattle futures contract.

The holder of a feeder cattle 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 feeder cattle futures at the strike price.

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

Feeder Cattle Option Exchanges

Feeder Cattle option contracts are available for trading at Chicago Mercantile Exchange (CME).

CME Feeder Cattle option prices are quoted in dollars and cents per pound and their underlying futures are traded in lots of 50000 pounds (23 metric tons) of feeder cattle.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
CME Feeder Cattle Options 50000 lb
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Feeder Cattle call options are purchased by traders who are bullish about feeder cattle prices. Traders who believe that feeder cattle prices will fall can buy feeder cattle 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.

Feeder Cattle Options vs. Feeder Cattle Futures

Additional Leverage

Limit Potential Losses

As feeder cattle options only grant the right but not the obligation to assume the underlying feeder cattle 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.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a feeder cattle 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.

Learn More About Feeder Cattle Futures & Options Trading

You May Also Like

Continue Reading.

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. ]

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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. ]

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 Options Explained

Live Cattle options are option contracts in which the underlying asset is a live cattle futures contract.

The holder of a live cattle 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 live cattle futures at the strike price.

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

Live Cattle Option Exchanges

Live Cattle option contracts are available for trading at Chicago Mercantile Exchange (CME).

CME Live Cattle 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 live cattle.

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

Call and Put Options

Options are divided into two classes – calls and puts. Live Cattle call options are purchased by traders who are bullish about live cattle prices. Traders who believe that live cattle prices will fall can buy live cattle 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.

Live Cattle Options vs. Live Cattle Futures

Additional Leverage

Limit Potential Losses

As live cattle options only grant the right but not the obligation to assume the underlying live cattle 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.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a live cattle 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.

Learn More About Live Cattle Futures & Options Trading

You May Also Like

Continue Reading.

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. ]

What You Should Know About Feeder Cattle As Commodity – A Detailed Guide

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Last Updated on May 2, 2020

Why Are Feeder Cattle Valuable?

Feeder cattle are weaned calves that reach a weight of between 600 to 800 pounds. At this point, cattle producers feed them a diet of high-energy feed to promote weight gain. Ultimately, when they reach a weight of about 1,200 to 1,400 pounds, feeder cattle are slaughtered to produce beef.

Worldwide consumption of beef approaches nearly 60 million metric tons annually.

The economic impact of the meat and poultry industry in the United States alone is over $1 trillion. Beef production creates millions of jobs including suppliers, distributors and retailers. Feeder cattle are a vital part of the global ecosystem of beef production and an important commodity in world markets.

How Do Ranchers Produce Feeder Cattle?

Producing feeder cattle is a complex, high-stakes business. Successful production relies on proper animal husbandry techniques as well as good economic decision-making.

Ranchers begin the process by breeding cows (females) with bulls (males) either naturally or with artificial insemination (A.I.). Ranchers traditionally breed cattle in the summer to produce calves in the spring.

A natural breeding process generally requires one bull for each 20 to 25 cows. Many producers prefer A.I. because they can better control the genetics of the calves.

Ranchers must allocate a set amount of acres of pasture or grazing land for each cow and its calf offspring. This set amount of land is known as the stocking rate, and it varies from region to region based on weather conditions and maintenance procedures.

In the United States –the top cattle producing nation in the world – the stocking rate can be as low as five acres per cow-calf pair in high precipitation regions of the East to 150 acres in dry, arid regions of the West and Southwest.

The Stocking Rate Determines How Many Cows There Are Per Acre – Image via Pixabay

A group of cows on a ranch is called a herd. Each cow generally gives birth to one calf, although some may occasionally produce twins. Not all cows conceive; weather, disease and nutrition can all affect conception rates.

Each year ranchers typically cull about 15 to 25% of the cows in their herd and send them to slaughter. The most common reasons for culling a cow include:

  1. Failure to reproduce
  2. Advanced age
  3. Bad teeth
  4. Drought conditions
  5. High feed costs.

Once the calves are born, a certain number of females are held back to replace the cows that are culled. The remaining calves are raised for eventual slaughter. The timeline for raising feeder cattle is as follows:

  1. First six months: Calves remain with the cow and receive their initial nutrition from nursing. Over time, ranchers supplement this nutrition with grass feeding and eventually with grain.
  2. Six to eight months of age: Calves typically weight 500 to 600 pounds at this stage. Ranchers wean the calf from the cow. Some very heavy calves go directly into feedlots, but most pass through stocker operations.
  3. Stocker operations: Calves get fed on summer grass, winter wheat or some other roughage until they reach the weight of 600 to 800 pounds, which is when they become feeder cattle. This phase generally lasts between six to 10 months.
  4. Feedlot: A rancher with feeder cattle has three options:
    1. Continue to raise the cattle on the rancher’s property until they reach the designated weight for slaughter
    2. Send the cattle to a commercial feedlot. A rancher would retain ownership of the cattle while the commercial feedlot feeds them.
    3. Sell the feeder cattle to another rancher or feedlot operation.

Weight Gain is Promoted with High-Energy Feed – Image via Pixabay

Feeder cattle receive high-energy feed to promote weight gain. They are usually either steers (castrated males) or heifers (females that have not given birth). Cows (females that have given birth) and bulls (sexually intact males) generally are kept for production and not placed in feedlots.

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    Free Trading Education!
    Big Sign-Up Bonus!

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