Lean Hogs Options Explained

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Lean Hogs Options Explained

Lean Hogs options are option contracts in which the underlying asset is a lean hogs futures contract.

The holder of a lean hogs option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying lean hogs futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Lean Hogs Option Exchanges

Lean Hogs option contracts are available for trading at Chicago Mercantile Exchange (CME).

CME Lean Hogs option prices are quoted in dollars and cents per pound and their underlying futures are traded in lots of 40000 pounds (18 metric tons) of lean hogs.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
CME Lean Hogs Options 40000 lb
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Lean Hogs call options are purchased by traders who are bullish about lean hogs prices. Traders who believe that lean hogs prices will fall can buy lean hogs put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Lean Hogs Options vs. Lean Hogs Futures

Additional Leverage

Limit Potential Losses

As lean hogs options only grant the right but not the obligation to assume the underlying lean hogs futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a lean hogs option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Lean Hogs Futures & Options Trading

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Lean Hogs Jun ’20 (HEM20)

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The Futures Options Quotes page provides a way to view the latest Options using current Intraday prices, or Daily Options using end-of-day prices.

Options prices are delayed at least 15 minutes, per exchange rules, and trade times are listed in CST.

Options Type

American Options: An American option is an option that can be exercised anytime during its life. American options allow option holders to exercise the option at any time prior to, and including its maturity date, thus increasing the value of the option to the holder.

European-Style Options: A European option is an option that can only be exercised at the end of its life, at its maturity. European options tend to sometimes trade at a discount to their comparable American option because American options allow investors more opportunities to exercise the contract.

Short Dated New Crop Options: The term short-dated refers to a shorter window before the option’s last trading day, otherwise known as option expiration. A traditional (or long-dated) option has a longer window before the option expires. In corn, traditional December calls and puts expire in late November. In soybeans, traditional November calls and puts expire in late October. Short-dated options have the same underlying futures contract (or instrument). The underlying futures contract for corn is December, and the underlying futures contract for soybeans is November. With short-dated, there are fewer days of coverage. As an example, a July short-dated option will expire in late June, even though the underlying futures contract is December.

Calendar Spread Options: A calendar spread is an option spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. Sometimes referred to as an interdelivery, intramarket, time or horizontal spread.

Weekly Options: Weekly options are the same as standard American Options, except they expire on a Friday.

  • Week 1 options expire on the first Friday of the month
  • Week 2 options expire on the second Friday of the month
  • Week 3 options expire on the third Friday of the month
  • Week 4 options expire on the forth Friday of the month
  • Week 5 options expire on the fifth Friday of the month (if it exists)

Weekly European Options: Same as Weekly Options above but can only be exercised at the maturity date (Friday).

Monday Weekly Options: A weekly option that expires on Monday rather than Friday.

  • Week 1 – 1st Friday of the month
  • Week 2 – 2nd Friday of the month
  • Week 3 – 3rd Friday of the month
  • Week 4 – 4th Friday of the month
  • Week 5 – 5th Friday of the month

Wednesday Weekly Options: A weekly option that expires on Wednesday rather than Friday.

  • Week 1 – 1st Wednesday of the month
  • Week 2 – 2nd Wednesday of the month
  • Week 3 – 3rd Wednesday of the month
  • Week 4 – 4th Wednesday of the month
  • Week 5 – 5th Wednesday of the month

New Crop Options: Options with an expiration date after harvest has been completed.

CSO Consecutive: A calendar Spread where the first leg is the front month and the second leg is the next available month.

Average Price Options: A type of option where the payoff depends on the difference between the strike price and the average price of the underlying asset. If the average price of the underlying asset over a specified time period exceeds the strike price of the average price put, the payoff to the option buyer is zero. Conversely, if the average price of the underlying asset is below the strike price of such a put, the payoff to the option buyer is positive and is the difference between the strike price and the average price. An average price put is considered an exotic option, since the payoff depends on the average price of the underlying over a period of time, as opposed to a straight put, the value of which depends on the price of the underlying asset at any point in time.

Crack Spreads: The spread created in commodity markets by purchasing oil options and offsetting the position by selling gasoline and heating oil options. This investment alignment allows the investor to hedge against risk due to the offsetting nature of the securities.

Crack Spread Average Price Options: Similar to Crack Spreads above, but use Average Price options.

MidCurve Options: Eurodollar Mid-Curve options are short-dated American-style options on long-dated Eurodollar futures. These options, with a time to expiration of three months to one year, have as their underlying instrument Eurodollar futures one, two, three, four or five years out on the yield curve.

Weekly 1-Year Options: Similar to MidCurve options, but expire in 1 weeks.

Weekly 2-Year Options: Similar to MidCurve options, but expire in 2 weeks.

Weekly 3-Year Options: Similar to MidCurve options, but expire in 3 weeks.

EOM Options: End Of Month options are designed to expire on the last business day of each calendar month, offering alignment with month-end accounting cycles.

Additional Selection Criteria

Select an options expiration date from the drop-down list at the top of the table, and select “Near-the-Money” or “Show All’ to view all options.

You can also view options in a Stacked or Side-by-Side view. The View setting determines how Puts and Calls are listed on the quote. For both views, “Near-the-Money” Calls are Puts are highlighted:

  • Near-the-Money – Puts: Strike Price is greater than the Last Price
  • Near-the-Money – Calls: Strike Price is less than the Last Price
Data Shown on the Page

For the selected Options Expiration date, the information listed at the top of the page includes:

  • Options Expiration: The last day on which an option may be exercised, or the date when an option contract ends. Also includes the number of days till options expiration (this number includes weekends and holidays).
  • Price Value of Option Point: The intrinsic dollar value of one option point. To calculate the premium of an option in US Dollars, multiply the current price of the option by the option contract’s point value. (Note: The point value will differ depending on the underlying commodity.)
Stacked View

A Stacked view lists Puts and Calls one on top of the other, sorted by descending Strike Price. Puts are identified with a “P” after the Strike Price, while Calls are identified with a “C” after the Strike Price.

  • Strike: The price at which the contract can be exercised. Strike prices are fixed in the contract. For call options, the strike price is where the shares can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold. The difference between the underlying contract’s current market price and the option’s strike price represents the amount of profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum amount that can be lost is the premium paid.
  • Open: The open price for the options contract for the day.
  • High: The high price for the options contract for the day.
  • Low: The low price for the options contract for the day.
  • Last: The last traded price for the options contract.
  • Change: Today’s change in price
  • Volume: The total number of option contracts bought and sold for the day, for that particular strike price.
  • Open Interest: Open Interest is the total number of open option contracts that have been traded but not yet liquidated via offsetting trades for that date.
  • Premium: The price of the options contract.
  • Time: The time of the last trade for the options contract.
Side-by-Side View

A Side-by-Side View lists Calls on the left and Puts on the right.

  • Last: The last traded price for the options contract.
  • Volume: The total number of option contracts bought and sold for the day, for that particular strike price.
  • Open Interest: Open Interest is the total number of open option contracts that have been traded but not yet liquidated via offsetting trades for that date.
  • Premium: The price of the options contract.
  • Strike: The price at which the contract can be exercised. Strike prices are fixed in the contract. For call options, the strike price is where the shares can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold. The difference between the underlying contract’s current market price and the option’s strike price represents the amount of profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum amount that can be lost is the premium paid.
Totals

The totals listed at the bottom of the page are calculated from All calls and puts, and not just Near-the-Money options.

  • Put Premium Total: The total dollar value of all put option premiums.
  • Call Premium Total: The total dollar value of all call option premiums.
  • Put/Call Premium Ratio: Put Premium Total / Call Premium Total
  • Put Open Interest Total: The total open interest of all put options.
  • Call Open Interest Total: The total open interest of all call options.
  • Put/Call Open Interest Ratio: Put Open Interest Total / Call Open Interest Total.

The Ultimate Guide to Lean Hogs Investing

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Last Updated on August 16, 2020

Lean hogs are the most commonly traded commodity product for gaining investment exposure to whole hog prices.

The importance of lean hogs is directly linked to the massive global pork industry. More people in the world consume pork than any other animal protein. Worldwide consumption of pork products exceeds 100 million metric tons annually and spans across diverse geographies, economies and cultures.

Companies and individuals involved in the production, distribution and sale of pork products use lean hog futures and options as tools for hedging risk. As a result, these financial products occupy a critical role in global food commodity markets.

How Do Farmers Produce Hogs?

Hog production involves three stages:

  1. Producing and raising young animals
  2. Feeding the pigs to slaughter weight
  3. Slaughtering and fabricating products from the animal

Successful production relies on proper animal husbandry techniques and good economic decision-making.

The hog industry has evolved dramatically in recent years as large private and corporate operations have replaced small family farms.

Farms with larger head counts (number of pigs) have at least two economic advantages:

  1. Lower production costs: Economies of scale allow farmers to feed pigs more efficiently and better utilize their labor.
  2. Negotiating leverage: Larger farms can enter into better contracts with packing operations – the companies that slaughter, process, pack and distribute hogs – since they can offer packers a more consistent supply of hogs.

Hog production takes place in five stages:

  1. Reproduction
  2. Gestation and birth
  3. Feeding
  4. Finishing
  5. Packing

Reproduction

Gilts (young females that have not yet given birth) and sows (mature female breeders) breed twice annually to ensure a steady flow of pigs for the operation.

Operators seek out gilts that show excellent growth, leanness and breeding potential. Farmers purchase boars (sexually mature males) from breeding farms.

Hog breeding takes place in one of three ways:

  1. Pen mating: One or more boars are placed with a group of sows.
  2. Hand mating: One boar is placed with one sow or gilt.
  3. Artificial insemination: A more labor intensive method that allows farmers to control genetics.

Gestation and birth

Female pigs have gestation periods of 4 months and give birth to average litters of 9 -10 pigs. This number has steadily increased in recent years due to improvements in health, genetics and production methods. Traders pay close attention to these yield figures as they determine the future supply of hogs coming to market.

Traders Pay Close Attention to Yields – Image via Pixabay

Weaning

Females wean baby pigs for three to four weeks. After this time, sows are either re-bred or sent to market. During the weaning stage, about 5% of pigs die from suffocation, disease, weather and other factors. Changes to this attrition number can affect supply and hog prices.

Feeding

Grains including corn, barley, milo, oats, distiller’s grains and wheat comprise the main diet of young pigs. Farmers often supplement the diet with oilseed meals and vitamins.

Grains Are a Popular Source of Food for Hogs – Image via Pixabay

Finishing

It takes about six months to raise a pig from birth to slaughter. A barrow (castrated male) or gilt typically gains on average about 1 pound a day during the finishing stages and will weigh about 270 pounds when they are ready for market. Producers usually sell pigs directly to packers.

Packing

Packers slaughter the pigs and butcher the carcasses into cuts that they sell to retailers. A typical 270 pound pig will yield a 200 pound carcass with an average of 25% ham, 25% loin, 16% belly, 11% picnic, 5% spareribs and 10% butt. Jowl, lean trim, lard and miscellaneous cuts and trimmings comprise the rest of the production.

Hog operations fall into four categories:

Type of Hog Operation Description
Farrow-to-Finish Handle all phases of production from birth to sale of a market-ready hog
Farrow-to-Wean Handle raising pig from birth to weight of about 10 -15 pounds and then sell to a feeder operation
Farrow-to-Feeder Raise hogs from birth to feeder stage (weight of 40 – 60 pounds) and then sell to a finishing operation
Finish Only Handle preparation of pigs prior to slaughter

Top 10 Pork Producers

Rank Flag Country Pork Produced per Year (1,000 Metric Tons)
#1 China 54,750
#2 European Union 23,350
#3 United States of America 12,188
#4 Brazil 3,755
#5 Russia 3,000
#6 Vietnam 2,775
#7 Canada 2,000
#8 Philippines 1,635
#9 Mexico 1,480
#10 South Korea 1,332

Top 3 Uses of Lean Hogs

Use of Lean Hog Description
Pork

Ham, pork loins and pork chops and are among the many food products produced from lean hogs. Pharmaceutical Co-Products

Pharmaceuticals rank second to meat in products obtained from lean hogs. The following are a small handful of the pharmaceutical products we obtain from hogs:

  • Cortisone
  • Blood Albumens
  • Heart valve replacements
  • Heparin
  • Estrogens
  • Insulin
  • Melatonin
  • Antidiuretic Hormone (ADH)
  • Oxytocin
  • Pespin
  • Thyroxin Industrial Co-Products

    Lean hogs make contributions to the production of many industrial products including the following:

  • Leather treatment agents
  • Plywood adhesives
  • Glue
  • Gloves and shoes
  • Buttons
  • Bone china
  • Bone meal
  • Brushes
  • Insulation
  • Upholstery
  • Insecticides
  • Cosmetics
  • Crayons
  • Floor waxes
  • Antifreeze
  • Plastics

    What Drives the Price of Lean Hogs?

    Some of the specific factors that move lean hog prices include:

    Feed Prices

    The cost of grains and feeds represents more than two-thirds of the production costs of producing pigs.

    Historically the price of livestock feed, especially corn, is inversely related to the price of lean hogs. As the price of corn rises, farmers take their hogs to market at lower weights to save on the higher costs. This creates an excess supply of hogs in the marketplace.

    Corn is such an integral part of the process of raising pigs that many farmers dependent on lean hog prices will hedge their exposure to corn prices. Traders looking to invest in lean hogs should keep a careful eye on grain markets and the factors that influence grain prices.

    Weather

    Extremely warm weather in the late summer and early fall can make hogs inactive and lessen their desire to mate. This could result in a smaller number of births in the winter months. The reduced supply can translate into higher prices at market in the following summer months when the pigs are taken to market.

    Hot Weather Can Make Pigs Inactive, Reducing Yield – Image via Pixabay

    On the other hand, cold winter weather can increase the number of births that take place in the spring months. Lean hog traders should pay close attention to weather patterns in key hog production regions.

    China

    China is a behemoth when it comes to pork production and consumption. The country produces and consumes about half of the world’s supply of pork products. In addition, China accounts for about 20% of the global supply of pork imports.

    As China continues its transformation into a world superpower, it will require more food to feed it growing population. The country will likely increase its volume of pork consumption as its population gets wealthier. Other emerging economies such as Mexico and South Korea may also have greater demand for pork as their economies get stronger.

    Substitution

    Pork competes with other animal protein products such as chicken, beef, lamb and fish.

    Many factors can impact which of these products consumers choose, but price often plays the biggest role. If pork prices rise, consumers may substitute other animal proteins in their diets.

    Other factors that could lead to substitution are the health benefits of the various choices. Hog farmers in the United States have made efforts to reduce the antibiotics used to produce pigs. In addition, the industry has changed the diet fed to pigs in an effort to produce leaner and healthier meat. How the public perceives these benefits can determine demand and price for lean hogs.

    3 Reasons You Might Invest in Lean Hogs

    Buying lean hogs can be a great addition to an investment portfolio for the following reasons:

    1. Bet on Demand from China
    2. Inflation Hedge
    3. Portfolio Diversification

    Bet on Demand from China

    Growth in Chinese demand for pork might be the best reason to invest in lean hogs.

    The global supply of pork has tightened in recent years as Chinese imports have risen sharply. If these patterns continue, there could be supply shortages and higher lean hog prices.

    Pork is a Key Ingredient in Chinese Cooking, Pushing Up Demand – Image via Pixabay

    Of course, the biggest determinant of demand in China will be the economy. However, pork has long been the favored animal protein in the country, and demand elasticity might be less than for other types of meat.

    Inflation Hedge

    Investing in lean hogs is a way to hedge against the loss of purchasing power from inflation. Livestock is almost certain to become more expensive if the world economy starts to overheat.

    Low interest rates from the Federal Reserve and other central banks have produced speculative bubbles in assets ranging from equities to high-yield debt to cryptocurrencies.

    Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Lean hog prices could benefit from these conditions.

    Portfolio diversification

    Investing in lean hogs might be a way to diversify a portion of a portfolio out of stocks and bonds and into commodities.

    Should I Invest in Lean Hogs?

    Lean hog prices are extremely volatile. Unlike crude oil or gold, the primary traders of the commodity are not speculators, but industry players hedging their risk exposures.

    Changes in weather, corn prices and demand from China, among other things, often create huge price swings. For this reason, traders may want to avoid taking large speculative positions in the commodity.

    However, traders might want to consider buying a diversified basket of commodities that includes lean hogs.

    Investing in a basket of commodities that includes lean hogs, other livestock and poultry, other agricultural commodities, metals and energy can provide a portfolio with protection against inflation. It could also insulate against large movements in individual commodities.

    Traders should also consider specifically investing in lean hogs because of the enormous importance of the Chinese market. Investing in lean hogs provides a way to participate in future economic growth in this huge economy.

    However, traders should also consider these three risks of investing in lean hogs:

    1. An economic slowdown in China could seriously limit demand for pork.
    2. Better hog breeding techniques and animal husbandry practices could create oversupplies of lean hogs.
    3. Health and environmental concerns could lead to decreases in pork consumption. In particular, hog producers have come under attack from environmental groups for waste and animal cruelty. Changes in perceptions about the industry could dampen demand.

    What Do the Experts Think About Lean Hogs?

    Pork industry experts are generally very optimistic about the prospects for lean hog prices in the future. Experts cite demand, especially from international sources, as the main catalyst for higher prices.

    We’re currently seeing so far this year in 2020, 15 percent more exports of pork, and it’s all going to foreign consumers. Strong demand is how we would explain the situation of more supply but even higher prices.

    – Chris Hurt, agricultural economist at Purdue University

    Chris Hurt Discusses the Hog Market – Image via YouTube

    Another expert shares this optimism and believes higher beef prices in the United States might fuel more pork demand.

    We’re pushing 4 percent more pork this year and 4 percent more pork next year. We’re going to be pushing those per capita offerings over 52 pounds per person [domestically], which is about as high as we’ve ever seen

    – Steve Meyer, vice president for EMI Analytics-Pork

    How Can I Invest in Lean Hogs?

    Investors have several ways to get investment exposure to lean hogs:

    Lean Hog Trading Methods Compared

    Leverage? Regulated Exchange? Lean Hog Futures 5 N N Y N Y Y Lean Hog Options 5 N N Y N Y Y Lean Hog ETFs (ETNs) 2 N N N Y N Y Lean Hog CFDs 3 N N N N Y Y

    Lean Hogs Futures

    The Chicago Mercantile Exchange (CME) offers a futures contract that settles into 40,000 pounds (18 metric tons) of lean hogs.

    The contract trades globally on the CME Globex electronic trading platform and has a variety of expiration months and cycles.

    Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, lean hog contracts are financially settled.

    Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

    Lean Hogs Options on Futures

    Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

    Options buyers pay a price known as a premium for each contract. An options bet succeeds only if the price of lean hogs futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in lean hog futures to profit from their trades.

    Lean Hogs ETFs

    These financial instruments trade as shares on exchanges in the same way that stocks do.

    There is one ETF that trades in London and invests in lean hogs:

    There are three US ETFs that invest generally in livestock:

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