37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 497
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Thus, if stock A goes up by one point, then the value of the index would increase
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by 1.20 points since there are 1.2 shares of stock A in the index. One can see the value
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of computing such a statistic - it readily allows him to see how any individual stock's
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movement will affect the index movement during a trading day. This is especially use
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ful when a stock is halted, but the index itself keeps trading.
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Example: Suppose that, in the above index, stock Chas halted trading. There are
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0.68 shares of stock C in the index. Suppose that stock C is indicated 3 points lower,
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but that the index is currently trading unchanged from the previous night's close due
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to the fact that both stocks A and B are unchanged on the day. If one were to try to
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price the options on the index, he would be wrong to use the current price of the
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index since that will soon change when stock C opens. However, there is not really a
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problem since one can readily see that if stock C opens 3 points lower, then the index
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will drop by 2.04 points (3 x 0.68). Thus one should price the options as if the index
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were already trading about 2 points lower. This kind of anticipation depends, of
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course, on knowing the number of shares of stock C in the index.
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A similar type of analysis is useful when trying to predict longer-term effects of
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a stock on an index. If you thought stock C had a chance of rallying 30 points, then
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one can see that this would cause the index to rise over 20 points. Given this type of
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relationship, there are sometimes option spreads between the stock's options and the
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index's options that will be profitable based on such an assumption.
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It should also be noted that the number of shares of stock in a capitalization
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weighted index does not change on a daily basis since it does not depend on the price
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of the stocks in the index. However, the percent that each stock comprises of the index
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does change each day as prices change. Thus, the number of shares is a more stable
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statistic to keep track of, and is also more directly usable to anticipate index value
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changes as stock prices change.
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Capitalization-weighted indices are the most prevalent type, and most investors
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are familiar with several of them: the Standard and Poor's 500, the Standard and
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Poor's 400, the Standard and Poor's 100 (also called by its quote symbol, OEX), the
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New York Stock Exchange Index, and the American Stock Exchange Index.
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PRICE-WEIGHTED INDICES
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A price-weighted index contains an equal number of shares of each stock in the index.
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A price-weighted index is computed by adding together the prices of the various
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stocks in the index and then dividing that sum by the divisor to produce the index
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value. Again, the divisor is initially an arbitrary number that is used to produce a
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desired original index value-something like 100.00, for example. Let us use the same |