You have some cattle you are finishing and will be selling

You have some cattle you are finishing and will be selling them in April 2020. April 2020 live cattle futures are trading at 126.250/cwt. You are looking at premiums on options and debating whether to use some options. A 122 Apr 20 Lives Cattle put is trading at 3.125 and a 122 Apr 20 Live Cattle call is trading at 6.350. A 130 Apr 20 Live Cattle put is trading at 6.500 and a 130 Apr 20 Live Cattle call is trading at 2.775. You expect basis will be 5.00 under when you sell your cattle. You use options to set a fence for your cattle sale.

a) Which option will you buy and which one will you sell to set the fence for you cattle sale? b) Calculate the price floor you set using this fence.

c) Calculate the price ceiling you set using this fence.

d) Suppose the April 2020 live cattle futures are trading at 132.000 when you sell your cattle and basis is 5.00 under.

1. Calculate the net gain/loss on your put.

2. Calculate the net gain/loss on your call.

3. Calculate your net selling price.