Pork Bellies Futures Trading Basics

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Contents

Pork Bellies Futures Trading Basics

Pork Bellies futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of pork bellies (eg. 40000 pounds) at a predetermined price on a future delivery date.

Pork Bellies Futures Exchanges

You can trade Pork Bellies futures at Chicago Mercantile Exchange (CME).

CME Frozen Pork Bellies futures prices are quoted in dollars and cents per pound and are traded in lot sizes of 40000 pounds (18 metric tons).

Exchange & Product Name Symbol Contract Size Initial Margin
CME Frozen Pork Bellies Futures
(Price Quotes)
PB 40000 pounds
(Full Contract Spec)
USD 1,890 (approx. 6%)
(Latest Margin Info)

Pork Bellies Futures Trading Basics

Consumers and producers of pork bellies can manage pork bellies price risk by purchasing and selling pork bellies futures. Pork Bellies producers can employ a short hedge to lock in a selling price for the pork bellies they produce while businesses that require pork bellies can utilize a long hedge to secure a purchase price for the commodity they need.

Pork Bellies futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable pork bellies price movement. Speculators buy pork bellies futures when they believe that pork bellies prices will go up. Conversely, they will sell pork bellies futures when they think that pork bellies prices will fall.

Learn More About Pork Bellies Futures & Options Trading

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

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Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Pork Bellies Options Explained

Pork Bellies options are option contracts in which the underlying asset is a pork bellies futures contract.

The holder of a pork bellies option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying pork bellies futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Pork Bellies Option Exchanges

Pork Bellies option contracts are available for trading at Chicago Mercantile Exchange (CME).

CME Pork Bellies option prices are quoted in dollars and cents per pound and their underlying futures are traded in lots of 40000 pounds (18 metric tons) of pork bellies.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
CME Pork Bellies Options 40000 lb
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Pork Bellies call options are purchased by traders who are bullish about pork bellies prices. Traders who believe that pork bellies prices will fall can buy pork bellies put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Pork Bellies Options vs. Pork Bellies Futures

Additional Leverage

Limit Potential Losses

As pork bellies options only grant the right but not the obligation to assume the underlying pork bellies futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a pork bellies option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Pork Bellies Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Can You Still Invest In Pork Bellies? The Trade Explained In 2020

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Last Updated on August 12, 2020

Why Are Pork Bellies Valuable?

Pork bellies are cuts of meat taken from the pig’s stomach. The high fat content of this cut makes it ideal for producing bacon.

Pork bellies have a long and storied tradition in financial markets. In 1961, their commoditization ushered in the first livestock trading markets on the Chicago Mercantile Exchange (CME). Over the years, they attracted a wide following from market analysts and traders eager to try to profit from the ups and downs of this niche market.

In 2020, the CME announced the end of pork bellies trading on its exchange. Extreme volatility coupled with dwindling trader interest made the product no longer relevant to financial markets.

However, pork bellies and bacon remain dietary staples for many people around the world, and demand for these products remains robust. For this reason, prices for pork bellies still influence global commodity markets.

Why Did Pork Bellies Become a Commodity?

The market for pork bellies started as a result of Americans’ love affair with bacon.

Before the advent of a transparent futures market for pork bellies, pork manufacturers experienced wild swings in their cost of producing bacon. The reason for this volatility was the seasonal nature of bacon demand in the United States in the 1950s and 1960s.

Although hog farms produced a steady supply of pork year-round, demand for particular cuts of pork varied by the calendar. In the hot summer months, Americans grilled more foods and used bacon as a topping on items ranging from summer salads to hamburgers. In the cold winter months, demand for bacon declined.

Pork producers aware of these seasonal fluctuations began buying, freezing and warehousing pork bellies. The idea was to smooth out their production costs and make their profits more predictable.

Once a Pig Was Butchered, the Pork Belly Would Be Stored in a Freezer – Image via Pixabay

Since pork bellies can be frozen for up to a year, the idea made economic sense. Not only could pork manufacturers insulate themselves from seasonal fluctuations in bacon demand, they also could protect against other supply shocks such as declines in hog production.

Ultimately, the growing interest in buying and selling pork bellies ushered in the pork belly futures contract on the CME.

Traders looking to capitalize on arbitrage opportunities began trading contracts to buy and sell standardized lots of pork bellies in the future. A standard lot consisted of a 40,000-pound frozen slab made up of eight- to 18-pound individual cuts. These standardized contracts provided traders, slaughterhouses and manufacturers with a transparent market for pricing pork bellies and conducting business.

Over the years, the seasonal patterns of bacon consumption became less pronounced. Americans began consuming more bacon year-round for a variety of reasons:

  1. Migration and demographic shifts resulted in more Americans moving south to states with less extreme seasonal weather differences.
  2. The fast-growing Latino population in the United States has fueled year-round demand for pork products including bacon.
  3. Americans are dining out more and the food service industry is supplying more recipes with pork bellies.
  4. The Pork Board, a leading industry group, is promoting consumption of a variety of cuts of pork including pork bellies.
  5. The growing popularity of Asian foods such as banh mi has created demand for pork bellies.

The unpredictability of seasonal bacon demand may have contributed to excessive volatility and dwindling interest in the CME pork bellies futures contract. However, overall pork belly demand is greater than ever, and pork producers still need to purchase the commodity to satisfy consumer demand.

How Are Pork Bellies Produced?

The production of pork bellies begins on hog farms that raise the animals for food. Modern hog farms have evolved dramatically in recent year as large private and corporate operations have replaced small family farms. The advantages of these mega-farms are two-fold:

  1. Lower production costs: Economies of scale allow farmers to feed pigs more efficiently and better utilize their labor. This results in more affordable cuts of pork for food manufacturers.
  2. Negotiating leverage: Larger farms can enter into better contracts with packing operations – the companies that slaughter, process, pack and distribute cuts of meat such as pork bellies. Packers are usually willing to pay more for hogs if a farmer can offer a consistent supply of the animals.

It takes about six months to raise a pig from birth to slaughter. At the time of slaughter, a typical hog weighs about 270 pounds.

Packing facilities purchase whole hogs from hog farms, slaughter them and process them into a variety of cuts of meat, which they sell to retailers. A typical 270-pound hog will yield a 200-pound carcass with an average of 25% ham, 25% loin, 16% belly, 11% picnic, 5% spareribs and 10% butt.

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