38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 509
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one is bidding for futures at a price of 1401.50 and a trade is printed at 1401.40, then
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he can be certain that he has bought his contracts.
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Futures exchange members who trade mainly for their own account from the
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ring or pit are known as locals." They are somewhat akin to the stock option market
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maker in that they may take the other side of public orders. Note, however, that they
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do not have to make a public market as market-makers do.
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MARGIN, LIMITS, AND QUOTES
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Futures contracts are traded on margin and are marked to market every day.
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Generally, the amount of margin required is small in comparison to the total size of
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the contract, so that there is tremendous leverage in trading futures. Anyone trading
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the futures must deposit the initial margin amount in his account on the day he ini
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tiates the trade. Then at the end of each day, the amount of gain or loss on the con
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tract is computed, and the account is credited if there is a gain or debited if there is
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a loss. In case of a loss, the trader must add more cash to his account to cover the
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loss. This daily margin computation is known as maintenance margin. Treasury bills
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or other securities are good collateral for the initial margin, but the daily variation
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margin is required in cash.
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Example: The S&P 500 futures contract is a cash-based futures contract that trades
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on the Chicago Mercantile Exchange. Since the contract is settled in cash, there is
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no actual physical commodity underlying the contract. Rather, the contract is based
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on the value of the S&P 500 stock index. At the expiration of the contract, each open
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contract is marked to market at the closing price of the S&P 500 stock index and dis
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appears. All contracts are settled for cash on their final day and then they no longer
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exist - they expire. The terms of the contract specify that each point of movement is
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worth $250. Thus, if the S&P 500 Index itself is at 1405, then the S&P futures con
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tract is a contract on $250 x 1405, or $351,250 worth of stocks comprising the index.
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Assume the initial margin for one of these contracts is $30,000, although it may vary
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at specific brokerage houses.
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Suppose that a trader buys one December S&P futures contract for his account
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sometime in October. With the underlying index at 1405.00, suppose he pays 1417.50
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for the futures contract. It is normal for the futures to trade at a premium to the actu
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al index price. The reasons regarding this will be discussed in a later section. Initially,
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the customer puts up $30,000 as margin, and this may be in the form of T-bills. On
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the next day, however, the market declines and the futures close at 1406.00. This rep
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resents a loss of 11.50 points from the purchase price. At $250 per point, the trader
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has a loss of $2,875 (250 x 11.50) at this time. He is required to add $2,875 in cash
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into the account. |