39 lines
2.8 KiB
Plaintext
39 lines
2.8 KiB
Plaintext
Chapter 34: Futures and Futures Options 661
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needs March soybean futures to be trading at 608.25 or higher at expiration in order
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to have a profit at that time. This is the normal way in which a call buyer views his
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break-even point at expiration: strike price plus cost of the call. It is not necessary to
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know that soybean options are worth $50 per point in order to know that 608.25 is
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the break-even price at expiration.
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If the future is a cash settlement future (Eurodollar, S&P 500, and other
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indices), then the options and futures generally expire simultaneously at the end of
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trading on the last trading day. (Actually, the S&P's expire on the next morning's
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opening.) However, options on physical futures will expire before the first notice day
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of the actual futures contract, in order to give traders time to close out their positions
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before receiving a delivery notice. The fact that the option expires in advance of the
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expiration of the underlying future has a slightly odd effect: The option often expires
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in the month preceding the month used to describe it.
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Example: Options on March soybean futures are referred to as "March options."
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They do not actually expire in March - however, the soybean futures do.
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The rather arcane definition of the last trading day for soybean options is "the
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last Friday preceding the last business day of the month prior to the contract month
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by at least 5 business days"!
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Thus, the March soybean options actually expire in February. Assume that the
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last Friday of February is the 23rd. If there is no holiday during the business week of
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February 19th to 23rd, then the soybean options will expire on Friday, February
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16th, which is 5 business days before the last Friday of February.
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However, if President's Day happened to fall on Monday, February 19th, then
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there would only be four business days during the week of the 19th to the 23rd, so
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the options would have to expire one Friday earlier, on February 9th.
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Not too simple, right? The best thing to do is to have a futures and options expi
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ration calendar that one can refer to. Futures Magazine publishes a yearly calendar
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in its December issue, annually, as well as monthly calendars which are published
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each month of the year. Alternatively, your broker should be able to provide you with
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the information.
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In any case, the March soybean futures options expire in February, well in
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advance of the first notice day for March soybeans, which is the last business day of
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the month preceding the expiration month (February 28th in this case). The futures
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option trader must be careful not to assume that there is a long time between option
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expiration and first notice day of the futures contract. In certain commodities, the
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futures first notice day is the day after the options expire (live cattle futures, for
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example).
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