36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
500 Part V: Index Options and Futures
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of IBM, one might figure that capitalization-weighted indices that contained that
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stock would also be showing somewhat unusual price changes in the same direction
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that IBM is moving. A price-weighted index that contained IBM would, of course,
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also be affected by IBM's price change, but not extraordinarily so since IBM would
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have far less weight in the price-weighted index.
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SECTORS
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Sector is a term used to refer to an index of stocks in which all the stocks are mem
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bers of the same industry group. Examples of groups on which sectors have been cre
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ated - and on which options have traded - are computers and technology, interna
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tional oils, domestic oils, gold, transportation, airlines, and gaming and hotels. These
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indices are computed in the same ways as described above - either price-weighted
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or capitalization-weighted. They generally consist of fewer stocks than their major
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counterparts, however. Most sectors are comprised of between 20 and 30 stocks,
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since that is about all of the stocks in any one specific industry group. The large
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indices are usually referred to as "broad-based" indices, as opposed to the smaller
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sectors which are often referred to as "narrow-based" indices.
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Options trade on these sectors. The intent of these options is to allow portfolio
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managers -who often are group-oriented- to be able to hedge off parts of their port
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folio by industry group. The options on these sectors are usually cash-based options.
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Strategies will be discussed later, but there is not much difference in strategy
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between broad-based or narrow-based index options. One difference is that broad
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based option writers receive more favorable margin treatment ( that is, they are
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required to put up less collateral) than narrow-based option writers.
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CASH-BASED OPTIONS
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Now that the reader is familiar with indices, let us look at the most popular type of
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listed index option, the cash-based option.
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Cash-based options do not have any physical entity underlying the option con
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tract. Rather, if the option is exercised or assigned, the settlement is done with cash
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only - there is no equity involved. This type of option is generally issued on an index,
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such as the S&P 500, for which it would be virtually impossible to actually deliver the
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underlying securities in case of assignment or exercise.
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Since many investors feel that it is easier to predict the market's movement
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rather than that of an individual stock, the cash-based index option has become very
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popular. Other indices that underlie cash-based option contracts are the New York
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Stock Exchange Index, the S&P 500 Index, the S&P 100 Index (OEX - an index |