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"Over recent years hog production has become a year-round process," said Michael J. Downs, Chairman of the CME Lean Hog Committee, "and producers have requested a risk management tool for the five calendar months in which no futures contract is available. These new cash options will give our customers what they need, while preserving the liquidity of lean hog futures." "Feeder cattle and our other agricultural futures contracts have served livestock producers for three decades," said Fred Moore, Chairman of the CME Feeder Cattle Committee. "With the launch of these innovative options on the CME Feeder Cattle Index, producers will gain a new tool for managing price risk in the marketplace."
Options on the CME Lean Hog Index will be listed 120 days ahead of expiration for January, March, May, September and November and will expire on the tenth business day of the contract month. Strike price intervals will be set at $.01, and the options will feature European style exercise, i.e., exercise at expiration only.
Options on the CME Feeder Cattle Index will be listed 180 days ahead of expiration for February, June and July and will expire on the last Thursday of the contract month. Strike price intervals will be listed at $.01 and $.005. Exercise will be European style.
Both contracts will trade via open outcry during the same hours that lean hog and feeder cattle futures trade-9:05 a.m to 1:00 p.m. for feeder cattle and 9:10 a.m to1:00 p.m. for lean hogs. These contracts differ from the existing options on futures contracts in that they are based directly on the value of the cash index price rather than an underlying futures contract. At exercise, option holders would receive the difference between the options strike price and the CME Lean Hog Index or CME Feeder Cattle Index for the day of expiration.
Hog and cattle producers could manage price risk by buying put options on the appropriate index. For example, if a hog producer bought a put with a strike price of $68 and the CME Lean Hog Index was valued at $66 at expiration, the option holder would receive two dollars per hundredweight, or $800 for each option exercised. If the CME Lean Hog Index had moved to a price above $68, the option would expire worthless, but the producer might expect to receive a price higher than his target upon marketing the hogs.
A start-up date for trading the new contracts has not yet been set. The CME plans to list the contracts for certification by the Commodity Futures Trading Commission (CFTC) in conjunction with offering the new options.
