Lean Hogs Option Price
The
futures lean hog price, and the lean hogs 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.”
For example:
If lean hog is trading at $.70, a $.65 call option is
$.05 in the money so the intrinsic value of the option is $2,000.
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.
Lean hogs option prices do not move in tandem with futures
prices. A $.01 move in your favor in the lean hog futures markets does not necessarily equal to a $.01 increase in the lean
hogs 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.
For example:
If
a lean hogs call option has a delta of .5 and the price of the lean hogs futures market increases by $.01 the value of the
option will increase by $.005 or $200.
If you are a speculator with a limited amount of risk
capital then lean hogs options may be the best way for you to invest in the lean hogs market.
Click here to view the current price of lean hog options.
