36 lines
2.4 KiB
Plaintext
36 lines
2.4 KiB
Plaintext
664 Part V: Index Options and Futures
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cisable into the June futures at April expiration. Since the June futures contract will
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still have some time premium in it in April, the strategist cannot plan his strategy with
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respect to where the actual S&P 500 Index will be in April.
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Example: The S&P 500 Stock Index (symbol SPX) is trading at 410.50. The follow
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ing prices exist:
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Cash (SPX): 410.50
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June futures: 415.00
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Options
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April 415 coll: 5.00
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June 415 coll: 10.00
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If one buys the June 415 call for 10.00, he knows that the SPX Index will have
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to rise to 425.00 in order for his call purchase to break even at June expiration. Since
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the SPX is currently at 410.50, a rise of 14.50 by the cash index itself will be neces
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sary for break-even at June expiration.
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However, a similar analysis will not work for calculating the break-even price for
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the April 415 call at April expiration. Since 5.00 points are being paid for the 415 call,
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the break-even at April expiration is 420. But exactly what needs to be at 420? The
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June future, since that is what the April calls are exercisable into.
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Currently, the June futures are trading at a premium of 4.50 to the cash index
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(415.00 - 410.50). However, by April expiration, the fair value of that premium will
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have shrunk. Suppose that fair .value is projected to be 3.50 premium at April expi
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ration. Then the SPX would have to be at 416.50 in order for the June futures to be
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fairly valued at 420.00 (416.50 + 3.50 = 420.00).
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Consequently, the SPX cash index would have to rise 6 points, from 410.50 to
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416.50, in order for the June futures to trade at 420 at April expiration. If this hap
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pened, the April 415 call purchase would break even at expiration.
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Quote symbols for futures options have improved greatly over the years. Most
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vendors use the convenient method of stating the striking price as a numeric num
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ber. The only "code" that is required is that of the expiration month. The codes for
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futures and futures options expiration months are shown in Table 34-1. Thus, a
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March (2002) soybean 600 call would use a symbol that is something like SH2C600,
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where S is the symbol for soybeans, H is the symbol for March, 2 means 2002, C
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stands for call option, and 600 is the striking price. This is a lot simpler and more flex
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ible than stock options. There is no need for assigning striking prices to letters of the
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alphabet, as stocks do, to everyone's great consternation and confusion. |