Live Cattle Option Price
The futures live cattle price, and the
live 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.”
For example:
If live cattle is trading at $.90, a $.85 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.
Live cattle option prices do not move in tandem with futures prices. A $.01 move in your favor in the
live cattle futures markets does not necessarily equal to a $.01 increase in the live 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.
For example:
If a live cattle call option has a delta of .5 and the
price of the live cattle 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 live cattle options may be the best
way for you to invest in the live cattle market.
Click here to view the current price of live cattle options.
