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The advantages and disadvantages of using a hedging strategy to market your livestock commodity or purchase feed inputs are offered below. Using Options for Protection from a Price Drop When Selling Livestock Commodities When using options, your livestock commodity is still sold in the traditional local cash market.

You purchase and hold put options (the right to a short futures position) during the production process. The put options are converted to money (if they have value), or are allowed to expire worthless (if they have no value) when the livestock commodity is sold on the cash market.

Options represent a potential position in the futures market, so they are in the same increments (for example, 40,000 pounds for live cattle) as the underlying futures contract. The net price you receive for the livestock commodity is a combination of the cash market transaction and the options market transaction. Options provide an opportunity for the producer to establish a minimum price without giving up all of the gain if cash prices rise.

Your ability to predict basis determines whether your price objective is achieved. The amount paid for price protection (the premium) is known at the time of purchase. Unlike hedging with a futures contract, there is no margin account to maintain. The following example involves the sale of fed cattle.

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