35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
514 Part V: Index Options and Futures
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OPTION PREMIUMS
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The dollar amount of trading of a futures option contract is normally the same as that
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of the underlying future. That is, since the S&P 500 future is worth $250 per point,
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so are the S&P 500 futures options. The same holds true for the New York Stock
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Exchange Index options.
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Example: An investor buys an S&P 500 December 1410 call for 4.20 with the index
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at 1409.50. The cost of the call is $1,050 (4.20 x 250). The call must be paid for in
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full, as with equity options.
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An interesting fact about futures options is that the longer-term options have a
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"double premium" effect. The option itself has time value premium and its underly
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ing security, the future, also has a premium over the physical commodity. This phe
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nomenon can produce some rather startling prices when looking at calendar spreads.
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Example: The ZYX Index is trading at 162.00 sometime during the month of
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January. Suppose that the March ZYX futures contract is trading at 163.50 and the
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June futures contract at 167.50. These prices are reasonable in that they represent a
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premium over the index itself which is 162.00. These premiums are related to the
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amount of time remaining until the expiration of the futures contract.
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Now, however, let us look at two options - the March 165 put and the June 165
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put. The March 165 put might be trading at 3 with its underlying security, the March
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futures contract, trading at 163.50. The June 165 put option has as its underlying
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security the June futures contract. Since the June option has more time remaining
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until expiration, it will have more time value premium than a March option would.
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However, the underlying June future is trading at 167.50, so the June 165 put option
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is 2½ points out-of-the-money and therefore might be selling for 2½. This makes a
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very strange-looking calendar spread with the longer-term option selling at 2½ and
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the near-term option selling for 3. This is due to the fact, of course, that the two
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options have different underlying securities. One is in-the-money and the other is
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out-of-the-money. These two underlyings - the March and June futures - have a
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price differential of their own. So the option calendar spread is inverted due to this
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double premium effect.
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FUTURES OPTION MARGIN
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Most futures exchanges have gone to the form of option margin called SPAN, which
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stands for Standard Portfolio Analysis of Risk. This form of margining is very fair and
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attempts to base the margin requirement of an option position on the probability of |