Livestock Calendar Spread Options

Options on calendar spreads will enable customers to mitigate the risk of changing price differentials between successive futures contract months when rolling from one futures contract month to another.

A futures calendar spread consists of a combination of a purchase in one futures contract month and a sale in another futures contract month.
A long call calendar spread option position is the equivalent of a long position in a nearer futures contract and a short position in a deferred futures contract.
A long put calendar spread option position is the equivalent of a short position in a nearer futures contract and a long position in a deferred futures contract.
A short call calendar spread option position is the equivalent of a short position in a nearer futures contract and a long position in a deferred futures contract.
A short put calendar spread option position is the equivalent of a long position in a nearer futures contract and a short position in a deferred futures contract.

The pricing convention is to subtract the price of the deferred futures contract month from the price of the nearer futures contract month to determine the trading price of the calendar spread option and the strike price. For example, if the nearer futures contract month has a price of 86.20 and the deferred futures contract month has a price of 85.15, then the calendar spread is said to have a value of positive 1.05 or +1.05 (86.20-85.15). Since it is possible that the price of the nearer futures contract month is equal to or less than the price of the deferred futures contract month, this leads to the possibility that trading and strike prices for calendar spread options will be a zero or negative value at times.

Resources
Introduction to Live Cattle and Lean Hog CSOs (PDF) Live Cattle and Lean Hog Calendar Spread Options : An Overview (PDF) The Benefits of Live Cattle and Lean Hog CSOs (PDF)

For more information, please contact:

Chicago Office Tom Clark Director, Agricultural Products CME Group Products and Services +1 312 930 4595 thomas.clark@cmegroup.com	London Office Jeffry Kuijpers Executive Director Commodity/Alt. Investment Products +44 207 796 7108 jeffry.kuijpers@cmegroup.com
Ankita Roy Manager Agricultural Products +1 312 930 3237 Ankita.roy@cmegroup.com	Singapore Office Nelson Low Executive Director Commodity Products Asia +11 6593 5570 nelson.low@cmegroup.com

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