Set a floor. Keep the upside. No margin calls when you buy.
Options are how many producers hedge: puts to protect what you sell, calls to cap what you buy, and combinations that lower the cost of both.
Options in plain terms
Put
The right to sell futures at a set price. Gains value when prices fall. Sellers of cattle and grain buy puts to set a floor.
Call
The right to buy futures at a set price. Gains value when prices rise. Buyers of feeders, corn or feed buy calls to set a ceiling.
Strike & premium
The strike is your protection level. The premium is what the protection costs. Closer strikes cost more; farther strikes cost less but protect less.
Time
Options lose value as expiration nears. Match the contract month to when you’ll sell or buy, and buy protection early enough to matter.
Four strategies producers use most
| Strategy | Who uses it | Protects | Upside | Cost |
|---|---|---|---|---|
| Buy a put | Cow-calf, stocker, feedlot, grain grower | Price floor | Fully kept | Premium |
| Buy a call | Feedlots buying feeders or corn, feed buyers | Price ceiling | Keep lower prices | Premium |
| Fence (collar) | Sellers who want a cheaper floor | Floor, with a set ceiling | Capped | Low or none; margin on the sold call |
| Put spread | Sellers who want cheaper protection against a moderate drop | A band of price risk | Fully kept | Less than a put alone |
What happens if the market moves?
A feeder cattle example: futures at $345, a $340 put bought for $8. Slide the price at sale time and compare.
Net price per cwt, assuming zero basis and the put held to expiration. Excludes commissions and fees. For illustration only.
“I already have crop insurance.” Here’s what it does — and doesn’t — cover.
Crop insurance and options hedging solve different problems. Insurance protects against losing bushels and a drop in price during the season. Options protect the price you sell at, on your timeline, at the level you choose. Most well-run operations use both.
| Revenue crop insurance | Options hedge | |
|---|---|---|
| Protects against | Lost yield and lower revenue | Lower prices only |
| Price it’s based on | A projected price set by USDA rules before the season, compared with a harvest price | The strike you choose, at any time |
| How much is covered | A percentage of expected revenue (coverage levels up to 85%) — the rest is your deductible | As many bushels or head as you choose to hedge |
| When you’re protected | For the insured season, with sign-up deadlines | Any time — next year’s crop, stored grain, or cattle on feed |
| When you get paid | After a loss is calculated, typically after harvest | Option value can be sold back any trading day |
| Local basis | Not covered | Not covered — managed separately |
| A price drop after harvest | Not covered once the insured period ends | Covered, if you hedge stored bushels |
Why they work better together
Insurance covers the bushels you might not grow, which makes it safer to price part of the crop early. The usual rule of thumb: hedge up to your insured bushels before harvest, then more once the crop is in the bin.
What your lender wants to see
- A written marketing plan with price targets
- Your breakeven and the floor you’ve set against it
- Insured bushels next to hedged bushels
- Monthly statements from your hedge account
Cattle: LRP vs. options
Livestock Risk Protection is USDA-backed price insurance for cattle. It can’t be adjusted once bought; options can be sold back or rolled. See the full comparison.
Crop insurance is sold by licensed crop insurance agents under USDA Risk Management Agency rules; terms vary by crop, county and policy. Talk with your agent about your coverage. Jackson Commodities does not sell insurance.
Worked examples
A floor under fall calves
- Buy a $340 feeder cattle put for $8.00
- Floor: $340 − $8 = $332/cwt plus basis
- If futures rally to $370, the put expires; you sell near $370 − $8 = $362
A ceiling on corn
- Buy a $4.60 corn call for $0.15
- Ceiling: $4.60 + $0.15 = $4.75/bu plus basis
- If corn drops to $4.20, the call expires; you buy near $4.20 + $0.15 = $4.35
A cheaper floor on KC wheat
- Buy a $6.50 put for $0.22, sell a $7.00 call for $0.12
- Net cost: $0.10/bu
- Floor $6.40, ceiling $6.90, plus basis
Cheaper protection on fed cattle
- Buy a $230 live cattle put for $6.00, sell a $215 put for $2.00
- Net cost: $4.00/cwt
- Protects from $230 down to $215 — a $15 drop — but not below $215
Prices are hypothetical, chosen to show how each strategy works, and do not reflect actual or expected market results. Examples exclude commissions and fees and assume options are held to expiration. Option sellers face margin requirements and losses that can exceed the premium collected.