Howdyjabo":2jsf5tf8 said:
I am just answering to see If I have it right-- so feel free to correct me
A put differs in that you pay more up front- but you don't have to worry about margins calls
and there is no limit on the upswing with a put- so if it goes to 1.67 you don't loose anything
If you have $140 put on Feeder cattle and it cost you $7.00 cwt premium. The feeder futures will need to surpass $147 in order for you to make money, and that will profit come thru selling the actual commodity in this case the calves, the first $7.00 goes back into your pocket to cover premium. Now if the feeder futures contract fall below $140 the feeder futures contract will need to fall below $133 before you will see a profit, because the first $7.00 goes back into your pocket to cover premium. Now lets say feeder futures drops to $120 you will exercise your option, you will be paid $20 cwt with $7cwt going back into pocket for premium. Now you sell the commodity at market price
add in you $13 cwt. So really you made $133 on 50,000#. On a lower market you lost on the commodity, but exercised the option at a profit. A higher market you lost only the premium but made money on the commodity.
Now a $140 futures contract will never be worth more than $140 and never less than $140. However in a higher market you will need to make margin calls until you settle the contract. You can settle a feeder futures contract with cash only. So you sell the commodity for more than $140 but that profit will need to settle contract or to return margain calls to you pocket. If the commodity falls below $140 that money goes into your account however at settlement it will need to be used to bring the value of the commodity back up to $140.
So to answer your question with a put $167 would pay you $20 cwt more than a straight futures contract