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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
Compared to the outright purchase of the underlying feeder cattle futures, feeder cattle options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.Additional Leverage
Compared to taking a position on the underlying feeder cattle futures outright, the buyer of a feeder cattle option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying feeder cattle futures.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.
Related Articles
- Feeder Cattle Futures Basics
- Buying Feeder Cattle Futures to Profit from a Rise in Feeder Cattle Prices
- Selling Feeder Cattle Futures to Profit from a Fall in Feeder Cattle Prices
- Feeder Cattle Call Option Trading Basics
- Feeder Cattle Put Option Trading Basics
- Hedging Against Rising Feeder Cattle Prices with Feeder Cattle Futures
- Hedging Against Falling Feeder Cattle Prices with Feeder Cattle Futures
