Commodities Futures Level II - Systems & Automated Trading

A put option strategy can also be used by producers of other livestock commodities, including weaned calves, feeder cattle, and milk. An Example of Using Options When Selling Fed Cattle The examples on the following page are designed to show how options can also be used to offset adverse price changes in the cash market. However, with options you obtain protection without giving up all of the gain associated with any favorable cash price movements.

The net price to you as the producer is still a combination of the options market and the cash market. Several important issues are not addressed such as what quantity to protect, when to place and lift the protection, selecting a strike price, and the broker’s commission.

The focus is on how the outcome of an option-based marketing strategy is related to both a cash position and an option position. The examples use two possible outcomes to illustrate the impact of both a decrease and an increase in the cash price. Although outcomes reflecting basis changes are not displayed, basis changes influence the option-based strategies in essentially the same way basis changes impact the futures-based short hedge strategy (see previous examples C and D).

The time period is late fall and you have placed 200 head of steers on feed (under retained ownership) with plans to finish and sell as slaughter steers in early May. As in the hedging example for fed cattle, June is the nearby futures contract and the expected basis is -1.00 cent (or 1.00 under).

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