Add training workflow, datasets, and runbook
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unexercised put is $0.00. If the price of the expiring futures contract is
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7,500, a 7,600 put should be exercised but not a call at 7,600 or a higher
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strike. The value of the exercised put is $1,000 and that of the unexercised
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call is $0.00.
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The profit on long options is the difference between the expiration value
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and the option premium. The profit on short options is the expiration value
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plus the option premium. The expiration values and profits on call and put
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options can often be an important tool in an investment strategy. Their
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payoff patterns and risk parameters make options quite different from
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futures. Their versatility makes them good instruments to adjust a portfolio
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to changing expectations about stock market conditions. Moreover, these
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expectations can range from general to specific predictions about the future
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direction and volatility of stock prices. Effectively, there is an option
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strategy suited to virtually every set of market conditions.
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Using futures options to participate in market movements
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Traders must often react to rapid and surprising events in the market. The
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transaction costs and price impact of buying or selling a portfolio's stocks
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on short notice inhibit many investors from reacting to short-term market
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developments. Shorting stocks is an even less palatable option for average
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investors because of the margin and risks involved and semantical
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prejudices.
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The flexibility that options provide can allow one to take advantage of the
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profits from market cycles quickly and conveniently. A long call option on
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Dow Index futures profits at all levels above its strike price. A long put
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option similarly profits at all levels below its strike price. Let us examine
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both strategies.
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Profits in rising markets
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In August, the Dow Index is 10,000 and the Dow Index September future is
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10,050. You expect the current Bull Market to continue, and you would like
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to take advantage of the trend without tying up too much capital and also
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undertake only limited risk.
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