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

Ready to Start Trading Futures?

Trade futures now at OptionsHouse.com with special low introductory contract rates!

To buy or sell futures, you need a broker that can handle futures trades.

OptionsHouse is a full fledged Futures Commission Merchant that provides a streamlined access to the futures markets at extremely reasonable contract rates.

Click here to open a futures trading account at OptionsHouse.com now!



Follow Us on Facebook to Get Daily Strategies & Tips!

Feeder Cattle Options & Futures

Futures Basics

Livestock Futures

Options Strategy Finder

Outlook on Underlying:


Profit Potential:


Loss Potential:


Credit/Debit:


No. Legs:


Join the Discussions @ The Options Forum

Beginners Questions

Advanced Strategy Talks

RSS Feed Widget

Trading Ideas & Opportunities




Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.