katrina
Well-known member
Hedging cattle... :tiphat:
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- Thread starter katrina
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Ha.... Been hedging on the board for the last 5 years and its been about a wash, but at least I could sleep at night. This year has been a different story. Made enough margin calls to scare the **** out of anybody that knows enough to be dangerous in the futures market.
I hear a lot of guys use puts, but I don't understand how they work.eatbeef said:Ha.... Been hedging on the board for the last 5 years and its been about a wash, but at least I could sleep at night. This year has been a different story. Made enough margin calls to scare the s*** out of anybody that knows enough to be dangerous in the futures market.
katrina
Well-known member
Yeah, I would like to know more. Guys explain how it works?
We preg checked cows for a guy yesterday. His wife is a drug rep and travels the country. Long story, but she stopped as we were finishing up last night, and was telling about the outfit that bought their steers last year. How they graded, dressed and all that. The funny part was when she got to telling about how much money they made per head.
I think it was somewhere around $110/animal, which we were all pleased with, until she said the would have made $315/head if they would not have locked them in early.
I think it was somewhere around $110/animal, which we were all pleased with, until she said the would have made $315/head if they would not have locked them in early.
strawking
Well-known member
A person can buy a put to protect them selves against a falling market. A put or call contract is 40000 lb. I beleive. If u buy a put your expecting the market to fall. If it falls you get paid on your put, if the market goes up you get paid on your cattle. If you buy a call your expecting the market to go up, so you would make money as it rises. I just looked the other day when the feeder board was at 230. It would cost right at 3400 to buy a put or a call at the market. But you could back up to 215 and buy a put contract for about a 1000. The farther away from 230 either lower for puts or higher for calls the cheaper the contract. If you back off the market 10 to 15 bucks you can protect your cattle for fairly cheap with paying several thousand dollars in margin calls.
The biggest thing that has kept me from hedging everything is that there is no way to lock in basis on cattle. Hedging grains is much easier as they are a more developed basis trading market.
Here is the contract spec sheet for feeder cattle.
http://www.cmegroup.com/trading/agricultural/livestock/feeder-cattle_contract_specifications.html
If you are trying to set a minimum price without limiting your upside potential you are going to buy a Put (think putting something up for sale) If the strike price is $236 cwt and it costs 9.2 cwt to buy it your are effectively setting a min-price contract of 226.8
Now this only accounts for the futures piece of the cattle's value and doesn't account for the cash market basis trade. So when you go to sell your cattle you will have to unwind your hedge. It is more of a protection against a market collapse than it is truly marketing your cattle. Quite simply just a risk management function. Now there are is a lot more to options than this but its kind of the quick guide.
On the current set of calves I have in the lot I have been looking at a LRP deal but with the board up every day there hasn't been a reason to lock anything in.
Here is the contract spec sheet for feeder cattle.
http://www.cmegroup.com/trading/agricultural/livestock/feeder-cattle_contract_specifications.html
If you are trying to set a minimum price without limiting your upside potential you are going to buy a Put (think putting something up for sale) If the strike price is $236 cwt and it costs 9.2 cwt to buy it your are effectively setting a min-price contract of 226.8
Now this only accounts for the futures piece of the cattle's value and doesn't account for the cash market basis trade. So when you go to sell your cattle you will have to unwind your hedge. It is more of a protection against a market collapse than it is truly marketing your cattle. Quite simply just a risk management function. Now there are is a lot more to options than this but its kind of the quick guide.
On the current set of calves I have in the lot I have been looking at a LRP deal but with the board up every day there hasn't been a reason to lock anything in.
Brad S
Well-known member
If I ever told the truth in my life, it's a hell of a good time to hedge. I usually can't find it in me to pay for options - they seem too expensive ( partly that's a flaw in my personality that I have to live with), but I usually like a simple hedge.
And now is the time for a simple hedge. If you lock in a good profit, don't look back at money left on the table. Here is my thought, but I preach to no one: there is a big boogeyman waiting to sack these high prices, when they get things going their way just a little bit, the funds will short the hell out of things, I plan to be short before the funds.
Another boogie man to fear is the general economy, if they weren't lying about the inflation rate, we'd have been in a recession the last several years despite all the phony money and deficits. This uncertainty justifys the cost of puts. Somebody suggested buying out of the money puts to save money, and that's pretty good advice.
And now is the time for a simple hedge. If you lock in a good profit, don't look back at money left on the table. Here is my thought, but I preach to no one: there is a big boogeyman waiting to sack these high prices, when they get things going their way just a little bit, the funds will short the hell out of things, I plan to be short before the funds.
Another boogie man to fear is the general economy, if they weren't lying about the inflation rate, we'd have been in a recession the last several years despite all the phony money and deficits. This uncertainty justifys the cost of puts. Somebody suggested buying out of the money puts to save money, and that's pretty good advice.
