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training_data/relevant/text/3bf13e61c1f1695a803140c02feca8bb19dbbb5c2b9cbc4c92819e4160b496d7.txt

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+284 Technical Analysis of Stock Trends
+of the futures price.  Of these variables, volatility is the only one that cannot be observed 
+directly. Considering all the other variables are known, however, it is possible to infer from 
+option prices an estimate of how the market is gauging volatility. This estimate is called the 
+“implied volatility” of the option. It measures the market’s average expectation of what the 
+volatility of the underlying futures return will be until the expiration of the option. Implied 
+volatility is usually expressed in annualized terms. The significance and use of implied 
+volatility is potentially complex and confusing for the general investor, professionals having 
+a decided edge in this area. Their edge can be removed by serious study.
+Exercising the option
+At expiration, the rules of optimal exercise are clear. The call owner should exercise the 
+option if the strike price is less than the underlying futures price. The value of the exercised 
+call is the difference between the futures price and the strike price. Conversely, the put 
+owner should exercise the option if the strike price is greater than the futures price. The 
+value of the exercised put is the difference between the strike price and the futures price.
+To illustrate, if the price of the expiring futures contract is 7 ,600, a call struck at 7 ,500 
+should be exercised, but a put at the same or lower strike price should not. The value of the 
+exercised call is $1,000. The value of the unexercised put is $0.00. If the price of the expiring 
+futures contract is 7 ,500, a 7 ,600 put should be exercised but not a call at 7 ,600 or a higher 
+strike. The value of the exercised put is $1,000 and that of the unexercised call is $0.00.
+The profit on long options is the difference between the expiration value and the option 
+premium. The profit on short options is the expiration value plus the option premium. 
+The expiration values and profits on call and put options can often be an important tool 
+in an investment strategy. Their payoff patterns and risk parameters make options quite 
+different from futures. Their versatility makes them good instruments to adjust a portfolio 
+to changing expectations about stock market conditions. Moreover, these expectations 
+can range from general to specific predictions about the future direction and volatility of 
+stock prices. Effectively, there is an option strategy suited to virtually every set of market 
+conditions.
+Using futures options to participate in market movements
+Traders must often react to rapid and surprising events in the market. The transaction 
+costs and price impact of buying or selling a portfolio’s stocks on short notice inhibit many 
+investors from reacting to short-term market developments. Shorting stocks is an even 
+less palatable option for average investors because of the margin and risks involved and 
+semantical prejudices.
+The flexibility that options provide can allow one to take advantage of the profits from 
+market cycles quickly and conveniently. A long call option on Dow Index futures profits 
+at all levels above its strike price. A long put option similarly profits at all levels below its 
+strike price. Let us examine both strategies.
+Profits in rising markets
+In August, the Dow Index is 10,000 and the Dow Index September future is 10,050. You 
+expect the current Bull Market to continue, and you would like to take advantage of the 
+trend without tying up too much capital and also undertake only limited risk.