Buying Lean Hogs Put Options to Profit from a Fall in Lean Hogs Prices


If you are bearish on lean hogs, you can profit from a fall in lean hogs price by buying (going long) lean hogs put options.

Example: Long Lean Hogs Put Option

You observed that the near-month CME Lean Hogs futures contract is trading at the price of USD 0.6015 per pound. A CME Lean Hogs put option with the same expiration month and a nearby strike price of USD 0.6000 is being priced at USD 0.0400/lb. Since each underlying CME Lean Hogs futures contract represents 40,000 pounds of lean hogs, the premium you need to pay to own the put option is USD 1,600.

Assuming that by option expiration day, the price of the underlying lean hogs futures has fallen by 15% and is now trading at USD 0.5113 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 lean hogs futures at the strike price of USD 0.6000. In other words, it also means that you get to sell 40,000 pounds of lean hogs at USD 0.6000/lb on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying lean hogs futures at the market price of USD 0.5113 per pound, resulting in a gain of USD 0.0887/lb. Since each CME Lean Hogs put option covers 40,000 pounds of lean hogs, gain from the long put position is USD 3,548. Deducting the initial premium of USD 1,600 you paid to purchase the put option, your net profit from the long put strategy will come to USD 1,948.

Long Lean Hogs Put Option Strategy
Gain from Option Exercise=(Option Strike Price - Market Price of Underlying Futures) x Contract Size
=(USD 0.6000/lb - USD 0.5113/lb) x 40000 lb
=USD 3,548
 
Investment=Initial Premium Paid
=USD 1,600
 
Net Profit=Gain from Option Exercise - Investment
=USD 3,548 - USD 1,600
=USD 1,948
 
Return on Investment=122%

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 lean hogs option sale will be equal to it's intrinsic value.

Learn More About Lean Hogs 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...]



Follow Us on Facebook to Get Daily Strategies & Tips!




Lean Hogs Options & Futures

Futures Basics

Livestock Futures

Options Strategy Finder

Outlook on Underlying:


Profit Potential:


Loss Potential:


Credit/Debit:


No. Legs:




Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide.com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.

General Risk Warning:
The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.

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

Copyright 2017. TheOptionsGuide.com - All Rights Reserved.