There are other strategies that provide the same or higher levels of returns with less variance. With this strategy, the price received is determined six months prior to marketing, and this alleviates some of the volatility associated with strictly cash marketing, as uncertainty increases with time. For example, when the December futures contract is sold in July, the only volatility associated with the December futures prices is the futures volatility between March and July. When pricing on the cash market, the cash December prices contain all the volatility from March through December. The difference in the commission costs of options compared to futures helps explain the lowered mean of gross returns.
Options also differ from hedges as there is a premium for the option.
Unlike futures hedges, options do not limit upward movement and this leads to the increased level of variance in gross return. This strategy is also consistent with theory as it shifts the lower tail of the gross return distribution to the right. This strategy also removes a significant portion of the lower tail of the revenue distribution. Essentially, this strategy reduces the variance of the return by pricing all the feed and hogs in March at the futures prices that are available at that time. As modeled, this only captures the diversification effects on returns minus feed and risk management costs.