Example assumptions: Prices, premiums, margin deposits, exchange names and contract sizes below are historical teaching inputs. They are not current quotes or an offer of a listed contract. Check the current market resources and the exact option or futures specifications. Examples exclude fees and funding costs.
If you are bearish on feeder cattle, you can profit from a fall in feeder cattle price by taking up a short position in the feeder cattle futures market. You can do so by selling (shorting) one or more feeder cattle futures contracts at a futures exchange.
Example: Short Feeder Cattle Futures Trade
You decide to go short one near-month CME Feeder Cattle Futures contract at the price of USD 0.9520/lb. Since each Feeder Cattle futures contract represents 50000 pounds of feeder cattle, the value of the contract is USD 47,600. To enter the short futures position, you have to put up an initial margin of USD 2,025.
A week later, the price of feeder cattle falls and correspondingly, the price of CME Feeder Cattle futures drops to USD 0.8568 per pound. Each contract is now worth only USD 42,840. So by closing out your futures position now, you can exit your short position in Feeder Cattle Futures with a profit of USD 4,760.
| Short Feeder Cattle Futures Strategy: Sell HIGH, Buy LOW | |
| SELL 50000 pounds of feeder cattle at USD 0.9520/lb | USD 47,600 |
| BUY 50000 pounds of feeder cattle at USD 0.8568/lb | USD 42,840 |
| Profit | USD 4,760 |
| Initial margin (assumed collateral) | USD 2,025 |
| Return on assumed initial margin | 235.0617% |
Margin Requirements & Leverage
In the examples shown above, although feeder cattle prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 4.2542%) required to control a large amount of feeder cattle represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
Learn More About Feeder Cattle Futures & Options Trading
- Feeder Cattle Futures Basics
- Buying Feeder Cattle Futures to Profit from a Rise in Feeder Cattle Prices
- Feeder Cattle Options Basics
- Feeder Cattle Call Option Trading Basics
- Feeder Cattle Put Option Trading Basics
- Hedging Against Rising Feeder Cattle Prices with Feeder Cattle Futures
- Hedging Against Falling Feeder Cattle Prices with Feeder Cattle Futures
What the margin return leaves out
The return shown divides the example’s gain by its assumed opening collateral. It is not a return on a fully paid commodity purchase, an expected return, or a loss limit. Brokers can change margin requirements or liquidate positions, and futures losses can exceed the amount initially deposited. Some contracts can trade below zero; do not assume a universal zero price floor.
