Cash options on the CME Lean Hog Index represent a trading unit of 40,000 pounds. The contract will be listed approximately 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 $1 per hundredweight with a $20 strike price range. The options will feature European style exercise, i.e., exercise at expiration only. Cash options can be offset during regular trading hours.
"The new cash options contract will now provide producers with a valuable risk management tool that will enable them to manage their price risk throughout an entire year," said Terry Duffy, vice chairman of the CME board and a member of the Lean Hog Committee.
Cash options on the CME Lean Hog Index will trade via open outcry during the same hours as lean hog options on futures - 9:10 a.m. to 1:02 p.m. CDT. These contracts differ from the existing options on futures in that they are based directly on the value of a cash index rather than on an underlying futures contract. At exercise, option holders would receive the difference between the options strike price and the CME Lean Hog Index for the day of expiration.
As with options on lean hog futures, producers can use cash options on the CME Lean Hog Index to protect against lower price levels. Buying a put establishes a minimum price level if hog prices fall but leaves open the potential for a higher net price if hog prices rise before the contract expiration. Producers may also use puts and calls in combination to simulate a futures position. Buying a put and selling a call at the same strike price creates, in effect, a short (sell) futures position.
