31 lines
2.1 KiB
Plaintext
31 lines
2.1 KiB
Plaintext
long exercises, you become short one futures contract at 10,000. If you are
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short one put and the long exercises, you become long one futures contract
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at 10,000.
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Buyers of options enjoy fixed risk. They can lose no more than the premium
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they pay to go long an option. On the other hand, sellers of options have
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potentially unlimited risk. Catastrophic moves in the markets often
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bankrupt imprudent option sellers.
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Option premiums
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The purchase price of the option is called the option premium. The option
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premium is quoted in points, each point being worth $100. The premium for
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a Dow Index option is paid by the buyer at initiation of the transaction.
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The underlying instrument for one CBOT® futures option is one CBOT®
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DJIASM futures contract; so the option contract and the futures contract are
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essentially different expressions of the same instrument, and both are based
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on the Dow-Jones Index.
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Options premiums consist of two elements: intrinsic value and time value.
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The difference between the futures price and strike price is the intrinsic
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value of the option. If the futures price is greater than the strike price of a
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call, the call is said to be “in-the-money.” In fact, you can be long the
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futures contract at less than its current price. For example, if the futures
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price is 10,020 and the strike price is 10,000, the call is in-the-money and
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immediate exercise of the call pays $10.00 times the difference between the
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futures and strike price, or $10 x 20 = $200. If the futures price is less than
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the strike price, the call is “out-of-the-money.” If the two are equal, the call
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is “at-the-money.” A put is in-the-money if the futures price is less than the
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strike price and out-of-the-money if the futures price is greater than the
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strike price. It is at-the-money when these two prices are equal.
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Since a Dow Index futures option can be exercised at any date until
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expiration, and exercise results in a cash payment equal to the intrinsic
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value, the value of the option must be at least as great as its intrinsic value.
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The difference between the option price and the intrinsic value represents |