Options on futures contracts are another marketing alternative that minimizes price risk without some of the problems inherent in futures trading. Options can be bought and sold in the same manner as futures contracts. Yet by buying options, the cattleman can capture the price protection advantage offered by a futures contract without being significantly penalized if the market moves against his market position. Specifically, he will not be subject to any margin calls. Put options are purchased for a one-time, up front, cost called a premium.
Cattlemen frequently use put options for insurance to protect feeder cattle selling prices.
Put options effectively place a floor under the price received for the cattle. If the cash market moves higher as sale time approaches, the cattleman simply does not exercise the option. He sells the cattle in the cash market realizing the gain. All he loses is the premium originally paid when he purchased the put option. He is not required to pay a margin call as the futures price goes up.