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western iowa,by Denison | Options are divided in two class's-puts and calls-if your a feeder who thinks the price could drop you buy a put
if your bullish(prices rising ) you can buy a call
having the actual feeder cattle,you are already long the market(have cattle)
today you can buy a Nov feeder cattle put for a $1.88 strike price for $1.50 or $750 a contract@50,000# or about 66 head of 750# cattle at $11 a head,this option gives you the right but not the obligation to assume a feeder cattle postion on the board
The best way I can explain it is if the board goes down say to $180,you can exercise your option-which in my terms-I could sell my option or buy the board
your put is a cheap way to not have margain calls,puts a floor on that month of feeder cattle,but you still have the actual cattle
a lot of times the board is pretty close to actual sale barn prices
you are basicly paying about $11 a head to insure that if cattle fell you would have a hedge if they went lower
it's not the best game in town,but what I do instead of selling or buying a futures contract-
The most you are going to lose is that premium cost-on the other hand,you still have the live animal to sell-which hopefully brings more then where your futures option was bought
I guess if a guy is really bullish you could buy a call-which in essence is what you already have owning the actual live animal
Lots of information on the internet-reading a few hours a day on options,you will figure it out-buying a couple of puts you will also figure it out(which is what I did)selling the actual board look's risky to myself,but then feeding 900 head on the open market is a huge risk-one thing bout options,your risk is your premium,wither it be calls or puts-makes it nice for a hayseed farmer like myself to play the board without those huge margain's
I think in a post below someone asked about LRP-Livestock Risk Protection-
My take on LRP was you were paying someone to understand puts and calls -which in about 2 hours of reading ,you could save some money and do it yourself with the help of a broker
Whats really amazing to me is when someone feeds $1400 a head of feeder cattle and then complain it cost $11 a head to put a floor underneath that same $1400-a real eyeopener if you have 66 head or $92,400 that you marked a line in the sand that you wanted that as a minimum price as the market goes down to a $1.68
Sure nothing wrong with reducing risk
For less then 1% cost I like the options-and everyone is different,I'm willing to gamble a $100 a head-I don't like to gamble $1,000 a head when I don't have to
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puts and calls-feeder cattle
