42 lines
2.9 KiB
Plaintext
42 lines
2.9 KiB
Plaintext
478
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A Complete Guide to the Futures mArket either dollars (or cents) per unit or points. Table 34.1 illustrates how to calculate the dollar value of
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a premium. As a specific example, a trader who buys a $1,000 August gold call at a premium of $50
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pays $50/oz ($5,000 per contract) for the right to buy an August gold futures contract at $1,000
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(regardless of how high its price may rise) at any time up to the expiration date of the August option.
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Because options are traded for both puts and calls and a number of strike prices for each futures
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contract, the total number of different options traded in a market will far exceed the number of
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futures contracts—often by a factor of 10 to 1 or more. This broad variety of listed options provides
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the trader with myriad alternative trading strategies.
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Like their underlying futures contracts, options are exchange-traded, standardized contracts.
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Consequently, option positions can be offset prior to expiration simply by entering an order opposite
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to the position held. For example, the holder of a call could liquidate his position by entering an order
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to sell a call with the same expiration date and strike price.
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The buyer of a call seeks to profit from an anticipated price rise by locking in a specific purchase
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price. His maximum possible loss will be equal to the dollar amount of the premium paid for the
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option. This maximum loss would occur on an option held until expiration if the strike price were
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above the prevailing futures price. For example, if August gold futures were trading at $990 upon the
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expiration of the August option, a $1,000 call would be worthless because futures could be purchased
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more cheaply at the existing market price.
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3 If the futures were trading above the strike price at expira-
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tion, then the option would have some value and hence would be exercised. However, if the difference
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table 34.1 Determining the Dollar Value of Option premiums
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Contracts Quoted on an Index
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Option premium (in points) × $ value per point = $ value of the option premium
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Examples:
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E-mini S&P 500 options
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8.50 (option premium) × $50 per point = $425 (option premium $ value)
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U.S. dollar index options
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2.30 (option premium) × $1,000 per point = $2,300 (option premium $ value)
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Contracts Quoted in Dollars
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Option premium (in dollars or
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cents per unit)
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× No. of units in futures contract = $ value of the option premium
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Examples:
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Gold options
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$42 (option premium) × 100 (ounces in futures contract) = $4,200 (option premium $ value)
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WTI crude oil options
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$1.24 (option premium) × 1,000 (barrels in futures contract) = $1,240 (option premium $ value)
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3 However, it should be noted that even in this case, the call buyer could have recouped part of the premium if
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he had sold the option prior to expiration. This is true since the option will maintain some value (i.e., premium
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greater than zero) as long as there is some possibility of the futures price rising above the strike price prior to
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the expiration of the option. |