Feeder Cattle Option Price
The futures feeder cattle price, and the feeder cattle option price is not the same thing. Option price
valuation is not as straightforward as futures valuation. Option premium is comprised of intrinsic value and extrinsic value.
An option has intrinsic value if the market is trading above the strike price of a call option, or below
the strike price of a put option. If an option contract has intrinsic value it is called “in the money.” If an
option contract does not have intrinsic value it is called “out of the money.”
If feeder cattle is trading at $1.00, a $.95 call option
is $.05 in the money so the intrinsic value of the option is $2,500.
The extrinsic value
of the option is its “time value.” Extrinsic value takes into account the possibility that an option may go in
the money by expiration. The more time that an option has, the more extrinsic value it has. As an option approaches its expiration
date, it loses value. This is called time decay. At expiration, an option has no extrinsic value so if the option is out of
the money it expires worthless.
Feeder cattle option prices do not move in tandem with
futures prices. A $.01 move in your favor in the feeder cattle futures markets does not necessarily equal to a $.01 increase
in the feeder cattle option value. The amount that an option value will increase based upon an increase in its futures price
is called its delta. Call option deltas are measures from 0 to 1. As an option goes from “out of the money” to
“in the money” its delta increases.
If a feeder cattle call option has a delta of .5 and the price of the feeder cattle futures market increases
by $.01 the value of the option will increase by $.005 or $250.
If you are a speculator with a limited amount of risk capital then feeder cattle options may be the best
way for you to invest in the feeder cattle market.
Click here to view the current price of feeder cattle options.