put options

[Ferrisgeorge]

You may want to read more to help you make an informed decision. The put options are a way to buy "insurance against a market downturn" while still being able to profit from rising cattle prices. They are usually sold on the chicago mercantile exchange. The Chicago Mercantile Exchange(CME) has some information about how options and puts work. They are different that futures where margin call are a reality. Unfortunately one limitation of the cme options is you have to buy them in units of , I believe 48,000 lbs. If you do not operate in this volume of cattle then you may want to investigate the"Livestock Risk Protection Program". which is a government assisted program something like crop insurance. Just like forward contracting there are pros and cons with all these choices but they are tools which may help your marketing program. You county extension agent may also be able to assit you.

 

[Ryder]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

 

[Caustic Burno]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

I bought a few call's and put's through the years, I figured out pretty quick I didn't like that game. Most put's and call's are based on a 3 to 6 month contract, it get's down to how good is your crystal ball. It seemed to me I was paying a premium to trade stock like I had been doing for years without the premium.

 

[larryshoat]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

I bought a few call's and put's through the years, I figured out pretty quick I didn't like that game. Most put's and call's are based on a 3 to 6 month contract, it get's down to how good is your crystal ball. It seemed to me I was paying a premium to trade stock like I had been doing for years without the premium.

Good post, a lot of good information to consider.

We all understand if we own cattle and the price goes down, we have less money, with futures and options if we ain't danged careful we'll be losing money when they go up too.

That is very true Ryder. Shooting from the hip will cost you. I walked in one day, looked at the DTN screen, well without my glasses .83 looked just like .88, I lifted a hedge at 83 that I thought was 88.
I have a sheet that I keep the loads of cattle that I have sold written on, most of these contracts are written a year out so keeping track of it in your head is risky. So one day I walked in, looked at the screen and liked the looks of the April contract, I then contracted another load of cattle for April in effect double contracting the same cattle because I had neglected to update my sheet 6 months ago.
That one cost me about $8000, plus the anxiety of sitting there thinking everyday " they'll go down and I'll get out of this", well they didn't do anything but go up. In this case I physically bought the cattle to cover because it was basically a straight forward contract with a packer.

Larry

 

[kenny thomas]

Thanks to all for your comments. I have to learn more now. At least on the current deal I know if I boy them and deliver them 10 miles I make $10 per head. Beyond that the risk is not mine untill time to sell them. That pays me again a set amount.
No risk except me getting hurt. What are the odds of that happening? Oh yeah, almost as risky as the market prices. :lol:

 

[inbredredneck]

I guess I'd rather spend a little money to secure a bottom dollar, versus spending nothing and maybe getting who knows what. Gamblers lose money everyday, they only talk about it when they win big. To me winning a little everytime is good enough.

 

[cross_7]

the 48000 pounds, is that starting weight or ending weight ?

 

[kenny thomas]

This one I do know. It is ending weight.

 

[inbredredneck]

the 48000 pounds, is that starting weight or ending weight ?

feeder contract is 50,000#, live cattle contract is 40,000# not real sure where the 48,000# is coming from it is not the cme for sure

 

[inbredredneck]

This one I do know. It is ending weight.

or the starting weight if your the buyer ;-)

 

[inbredredneck]

the 48000 pounds, is that starting weight or ending weight ?

In reality there is no starting or ending weight, I was just pulling on Kenny's chain. the weights I listed are CME contract size for each commodity.

 

[larryshoat]

One last comment is this, risk managing strategies for the last couple of years have been nearly useless, because cattle have done nothing but go up. That won't go on for ever someday they will go down and in that case having a risk management strategy in place will pay.

Larry

 

[kenny thomas]

the 48000 pounds, is that starting weight or ending weight ?

In reality there is no starting or ending weight, I was just pulling on Kenny's chain. the weights I listed are CME contract size for each commodity.

Why would you buy a contract on the starting weight instead of the selling weight?

 

[inbredredneck]

the 48000 pounds, is that starting weight or ending weight ?

In reality there is no starting or ending weight, I was just pulling on Kenny's chain. the weights I listed are CME contract size for each commodity.

Why would you buy a contract on the starting weight instead of the selling weight?

If there actually was a starting weight and an ending weight, I would buy an option on the starting weight to set a top price I will have to pay for calves. Same as the option someone would buy to sell their calves at a minimum price. But like I said it is the size of the contract, not starting size or ending size. Futures contracts have specific sizes.

 

[cross_7]

i keep thinking in terms of real cattle and not paper so i get confused at times.

 

[inbredredneck]

i keep thinking in terms of real cattle and not paper so i get confused at times.

real cattle or paper cattle a pound is a pound, and a feeder futures contract is 50,000# in size.

 

[inbredredneck]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

How do stock options work when you don't own the commodity to offset the contract? I have never traded stock options so this is a honest question.

 

[cross_7]

i keep thinking in terms of real cattle and not paper so i get confused at times.

real cattle or paper cattle a pound is a pound, and a feeder futures contract is 50,000# in size.

true but you don't have own a calf one to trade, so the actual weight of the cattle you own is not a factor.

 

[Caustic Burno]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

How do stock options work when you don't own the commodity to offset the contract? I have never traded stock options so this is a honest question.

You have the option to buy at a later date for a certain price. Example on a bonus I recieved one time I recieved stock options to purchase a thousand shares at 35 dollar's a share and the right to exercise the option in one year. If you don't exercise the option or the stock goes below the option price you loose. If you exercise the option at 70 dollars a share you get two for one.

 

[inbredredneck]

I have not traded livestock options, but I have stock options. I don't see that there would be any difference in the way they work.
It is very easy to get confuaed in the heat of battle.
A big problem or advantage with options is that they can move so fast.
Options suffer time decay (wasting asset) and this is what probably knocks most people out of the market.
I'm not saying don't do it, but make sure you are well schooled. That takes more than a little time.

How do stock options work when you don't own the commodity to offset the contract? I have never traded stock options so this is a honest question.

You have the option to buy at a later date for a certain price. Example on a bonus I recieved one time I recieved stock options to purchase a thousand shares at 35 dollar's a share and the right to exercise the option in one year. If you don't exercise the option or the stock goes below the option price you loose. If you exercise the option at 70 dollars a share you get two for one.

so in reality a stock option only guarantees you a $35 dollar stock for x amount of dollars, and you have nothing to offset the market decline?