37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 511
|
||
(perhaps caused by news) or if there are severe order imbalances in many of the
|
||
stocks (caused by index arbitrageurs). Index arbitrage is described in Chapter 30.
|
||
Limits. Originally, index futures traded without limits. However, the stock mar
|
||
ket crash of 1987 changed that. Certain parties felt that if the futures - which
|
||
were leading the market down - had ceased trading for a while, the stock mar
|
||
ket could have stabilized. As a result, a series of trading limits now exists for
|
||
stock index futures. These are designed to be "circuit breakers" - to prevent a
|
||
stock market crash. They are not limits in the sense that other futures have lim
|
||
its, but they are similar.
|
||
The levels at which these circuit breakers occur may change from time to time,
|
||
based on the volatility of the stock market and the price levels at which the S&P
|
||
futures are trading. That is, if the S&P futures are trading at 1500, one can expect
|
||
wider circuit breakers than if they are trading at 600. These circuit breakers only
|
||
apply to downside moves by the stock market. The first in the series of circuit break
|
||
ers usually halts trading for only 10 minutes. After that, if the market trades lower -
|
||
usually something on the order of a 10% decline - then a longer circuit breaker is
|
||
instituted for about 30 minutes or so. After that they could open again, and if they
|
||
reached the next limit down - something probably on the order of 20% then trad
|
||
ing would be halted for a longer time ( two hours or so again, the details depend on
|
||
the current regulations). If there is any time left in the trading day, they can open
|
||
again, and trade down to a final limit, at which time trading would be halted for the
|
||
day. They could not trade any lower that day, although they could trade lower the
|
||
next day if need be.
|
||
There are similar limits imposed by the NYSE on its trading - based on the
|
||
Dow-Jones Industrial Averages. Those limits don't necessarily line up exactly with the
|
||
limits on the S&P futures. That fact might cause problems for hedgers should any of
|
||
these severe downside limits actually occur.
|
||
There are actually other "circuit breakers" designed to prevent runaway stock
|
||
markets, but they are not related to limits on futures trading. They will be described
|
||
along with index arbitrage and program trading in Chapter 30.
|
||
Quotes. While stocks and stock options are always quoted in dimes, or some
|
||
times nickels, such is not the case with futures. Some futures trade in fractions,
|
||
while others trade in cents. In the coming chapters, there will be many examples
|
||
of the trading details of futures and options. However, the investor should famil
|
||
iarize himself with the details of an individual contract before beginning to trade
|
||
it or its options. One's commodity broker can easily supply this information. |