Live Cattle futures prices are influenced by physical market report releases, geopolitical risk and shifts in supply and demand, said the CME Group in a release about weekly options.
Unpredictable changes in any of those factors can affect positions, the CME Group said. Live cattle weekly options provide the opportunity for market participants to express their views on market moving events and manage associated volatility.
Participants can leverage lower option premiums coupled with greater precision to implement efficient and timely hedging strategies using live cattle weekly options.
FLEXIBILITY AND PRECISION
The USDA releases many data-rich reports that affect prices. These reports are released daily, weekly, monthly and semi-annually, and all can push or pressure futures prices.
Live Cattle Weekly options offer traders a way to target specific timeframes with reduced premium outlay compared with monthly options, the CME said.
With the ability to give more precise control over event-driven strategies, these contracts allow hedgers and speculators to fine tune their exposure around report dates like Cattle on Feed, the CME said. Live Cattle Weekly options expire on Monday afternoons, offering coverage through Friday Cattle on Feed report releases, for instance.
CASE IN POINT
A US-based feedlot operator is feeding cattle that he intends to sell in December. Cattle inventories have been tight, and he hopes to will receive a good price.
However, the feedlot operator believes feedlot placements for October, to be reported on in the Cattle on Feed report on Nov. 21, could be larger than the broader industry expectations he has seen. There also is recent macroeconomic uncertainty that could lead to a pullback in beef demand.
Both factors could result in price pressure for finished cattle within the next week.
To manage the potential short-term volatility and increased downside price risk associated with the upcoming report, the feedlot operator purchases weekly put options. This strategy allows the feedlot operator to manage downside risk at a reduced cost vs the standard Dec monthly option.
The cost of the Weekly put option is 1.00¢ vs the cost of the standard monthly Dec option is 5.00¢. Additionally, the cattle feeder’s expiration timeline is precise and tailored to specific short-term needs.
On Wednesday, Nov. 18, Dec live cattle futures are at $230 per cwt, so the feedlot operator purchases 15 weekly put options that will expire on Monday, Nov. 24. Say the Cattle on Feed report to be released on Friday, Nov. 21, showed October placements at 99% of the prior year, when average analyst expectations were at 93%.
At expiry, the underlying Dec live cattle futures price drops and settles at $227 per cwt. The physical position of the feedlot operator realizes an $18,000 loss in value. But because he used weekly options to construct a short hedge, the loss is offset partially with a $12,000 gain through the options position.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $228.38 per cwt to $228.59, compared with last week’s range of $229.81 to $239.00 per cwt. FOB dressed steers and heifers went for $358.20 per cwt to $359.44, compared with $361.70 to $369.29.
The USDA choice cutout Monday was down $0.32 per cwt at $370.41 while select was up $2.06 at $356.30. The choice/select spread narrowed to $14.11 from $16.49 with 56 loads of fabricated product and 19 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef as $402.23 per cwt, and 50% beef was $177.52.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.05 to $1.20 a bushel over the Dec corn contract, which settled at $4.34 3/4, up $0.04 1/2.
The CME Feeder Cattle Index for the seven days ended Friday was $341.89 per cwt, down $1.84. This compares with Monday’s Nov contract settlement of $339.85, up $1.17.