Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting
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The paper examines empirical returns from holding thirty- and ninety-day call and put positions,
and the forecasting performance of implied volatility in the live and feeder cattle options
markets. In both markets, implied volatility is an upwardly biased and inefficient predictor of
realized volatility, with bias most prominent in live cattle. While significant returns exist holding
several market positions, most strategies are strongly affected by a drift in futures market prices.
However, the returns from selling live cattle puts are persistent, and evidence from straddle
returns identifies that the market overprices volatility. This overpricing is consistent with a
short-term risk premium whose effect is magnified by extreme changes in market conditions.