38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
510 Part V: Index Options and Futures
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If he continued to hold the contract until expiration, this process of adding his
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daily gain or subtracting his daily loss from the account would recur each day. Finally,
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on the last day, the futures contract is deemed to close at the exact opening price of
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the S&P 500 Index and the variation margin is calculated again at that price. Then
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the futures contract is expired, so it is "erased" from his account. He is then left with
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only the cash that he made or lost on the trade of his contract.
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The leverage produced by small margin requirements (as a percent of the total
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value of the contract) is a major factor in making futures very volatile, in dollar terms.
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In the preceding example, a $30,000 margin investment controls $351,250 worth of
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stocks. Due to their volatility, many futures contracts trade with a limit. That is, the
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price can only fluctuate a fixed amount above or below the previous day's closing
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price. This concept is intended to prevent traders with large positions from being
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able to manipulate the market drastically in either direction.
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S&P and NYSE Expiration. S&P 500 futures expiration occurs in a some
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what complex way, compared to those indices whose options and futures expire
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at the last sale on the final day of trading. Some years ago, in order to attempt
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to reduce the volatility that index futures and options expiration was causing in
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the stock market, the NYSE and the Chicago Mercantile Exchange (where the
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S&P 500 futures trade) agreed to change the expiration of their index products
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from the end of trading on the last Friday to the morning of that day. The effect
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of expiration on the stock market is discussed in the next chapter.
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As a result, the S&P futures and futures options as well as futures, futures
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options, and index options on the New York Stock Exchange Index settle in the fol
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lowing manner on their last day of trading. On expiration day - the third Friday of
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the month - the "final" price for purposes of settling futures and options is comprised
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of taking the opening trade of each stock and calculating an index price based on
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those opening prices. There is no actual trading in the futures and options on that last
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Friday; they cease trading at the close of trading on the previous day, Thursday.
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The purpose of this change was to give the specialists on the New York Stock
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Exchange more time to line up the other side of trades to handle order imbalances.
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Under the new rules, index arbitrageurs are forced to enter their buy or sell orders
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as market on open orders on that last Friday before 9 am EST. The specialist can then
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take his time in opening the stock if he needs to; he can solicit orders if there is too
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much stock to buy or sell.
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The effect of all this is that the "final" index price for settlement purposes is not
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known until all the stocks in the index have opened. It may take some time to open
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all 500 stocks in the S&P 500 Index if there is a volatile market that Friday morning |