33 lines
2.0 KiB
Plaintext
33 lines
2.0 KiB
Plaintext
660 Part V: Index Options and Futures
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priced or underpriced as well. The arbitrage possibilities would be calculated in a
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manner similar to that described for index futures, the futures premium versus cash
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being the determining factor.
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OPTIONS ON FUTURES
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The reader is somewhat familiar with options on futures, having seen many examples
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of index futures options. The commercial use of the option is to lock in a worst-case
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price as opposed to a future price. The U.S. businessman from the earlier example
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sold Swiss franc futures to lock in a future price. However, he might decide instead
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to buy Swiss franc futures put options to hedge his downside risk, but still leave room
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for upside profits if the currency markets move in his favor.
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DESCRIPTION
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A futures option is an option on the futures contract, not on the cash commodity.
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Thus, if one exercises or assigns a futures option, he buys or sells the futures contract.
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The options are always for one contract of the underlying commodity. Splits and
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adjustments do not apply in the futures markets as they do for stock options. Futures
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options generally trade in the same denominations as the future itself ( there are a few
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exceptions to this rule, such as the T-bond options, which trade in sixty-fourths while
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the futures trade in thirty-seconds).
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Example: Soybean options will be used to illustrate the above features of futures
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options.
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Suppose that March soybeans are selling at 575.
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Soybean quotes are in cents. Thus, 575 is $5.75 - soybeans cost $5.75 per
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bushel. A soybean contract is for 5,000 bushels of soybeans, so a one-cent move is
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worth $50 (5,000 x .01). -
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Suppose the following option prices exist. The dollar cost of the options is also
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shown (one cent is worth $50).
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Option Price Dollar Cost
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March 525 put 5 $ 250
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March 550 call 35 1/2 $1,775
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March 600 call 81/4 $ 412.50
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The actual dollar cost is not necessary for the option strategist to determine the
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profitability of a certain strategy. For example, if one buys the March 600 call, he |