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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

Compared to the outright purchase of the underlying live cattle futures, live 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 live cattle futures outright, the buyer of a live cattle option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying live cattle futures.

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.

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