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Ridgway, IL | When i consider options strategies, i try to dare the market to make me wrong. In other words, position yourself to extract value out of the market in the event that you are exercised upon.
On 1 load of 800lb heifers. A 50,000 lb load is 62.5 head.
Last trade on the 136 puts was 1.025 x 50klb =625$ or 10$/hd
Your have a floor 11/cwt or 88$/hd BELOW current market, in a market where live cattle futures are making contract highs. You will be competing with a pile of growyard yearlings, and a bunch coming off wheat as well. You have 1 way to win, flat price must appreciate for you to be better off than you are today.
Another way to do it. Sell the futures (or a cash contract) at 1.46 (80$/hd better than just the puts) and then sell a put under the market. Example the 140's for 16$/hd. You are now leading with a position that gives you a guarantee 104$/hd better than just buying puts. In the event that you get exercised on, you are buying your 1.46 hedge back for 140 (48$/hd profit plus collecting the 16$ option premium = 64$/hd). Sure, if you are exercised upon you own the cattle at 1.40, but youve already said you're not scared to feed them to finish... and at that point your breakeven on them as fats going out is now 5c lower than where you are starting at 1325 out weight because of the value you extracted out of the market with your feeder position.
IF all you had was the 1.36 puts and the market trades down to 1.40... what do you have? Youre now selling a 48/hd lower price than where you started plus youre still out the 10/hd cost of the puts.
If the market goes up, sure you miss out on the top, but you have enhanced your margin by 16$/hd from sold puts. 16$/hd is HUGE in a preconditioning program. I mean to tell you 16$/hd could easily be a 20+% enhancement to your bottom line in a preconditioning operation.
The market would have to trade all the way down below 132 for you to be better off with your put only position than a cash sale plus short put. Thats not quite a black swan event, but its a 10% market correction. I do not see that as likely.
If you're putting yourself in a position to where the only way you win, is by the market trading higher... than just buy the futures and save all the headaches of doing the chores. | |
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Hedges/puts on feeder cattle?
