How Much Is the Smirk Worth? Downside Risk Pricing in Cattle Options

We develop a daily leverage premium measuring downside-asymmetric volatility risk within the filtered historical simulation framework of Barone-Adesi, Engle, and Mancini (2008). The leverage premium isolates the component of option-implied expected variance attributable to downside asymmetry beyond historical volatility dynamics. Applying this framework to daily options on live cattle, feeder cattle, and corn over 2019, we find that cattle options price about 25% more expected variance for downside asymmetry than historical patterns would justify—roughly twice the corn level. We then exploit the August 9, 2019 Tyson Holcomb fire to test whether option markets reprice downside risk following severe supply-chain disruptions. Using a difference-in-differences design with corn as the control market, the leverage premium increases for live cattle options during the disruption—by approximately 14% for regular options and 23% for serial options—and attenuates as processing capacity is restored. Feeder cattle, which are further upstream from the processing bottleneck, show no comparable response. Translated into hedging costs via a local Black (1976) approximation, the repricing implies $1.60–1.90 per head in additional cost for a representative short-dated, out-of-the-money live cattle put.