35 lines
2.7 KiB
Plaintext
35 lines
2.7 KiB
Plaintext
Chapter 29: lntrodudion to Index Option Produds and Futures S01
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introduced by the CBOE), the NASDAQ Index ($NDX), the Dow-Jones 30
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Industrials ($DIX), and several other indices. In each of these cases there are too
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many stocks in the index, and too many varying quantities of each of the stocks, to be
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able to handle the physical delivery of each of the stocks in the case of exercise or
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assignment. Some cash-based options are based on subindices ( that is, subgroups of
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the larger indices such as the transportation group).
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EXERCISE AND ASSIGNMENT
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It is important to understand the ramifications of exercise and assignment when deal
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ing with this type of option. When a cash-based option is exercised, the owner
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receives cash equal to the difference between the index's closing price and the strike
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price of the option. The option writer who is assigned must pay out an equal amount.
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The following example shows how a call exercise might work. In this and the follow
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ing examples we will use a fictional index '.lYX (index symbols often end in X).
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Example: Suppose an investor buys a '.lYX September 160 call option. At a later date,
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the index has risen substantially in price and closes at 175.24 on a particular day. The
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investor decides it is time to take his profit by exercising his call option. Assuming the
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'.lYX contract is worth $100 per point, just as stock options are, he receives cash in
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the amount of $100 times the difference between the index closing price and the
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strike price: $100 x (175.24 - 160.00) = $1,524. He has no further position or rights
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- the option position disappears from his account by virtue of the exercise and he
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does not acquire any security by the exercise; he gets only cash.
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An assignment would work in a similar manner, with the seller of an option hav
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ing to pay out of his account cash equal to the difference between the index closing
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price and the option's striking price. As an example, suppose that a trader sells a put
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option on the '.lYX Index - the October 165 put. Subsequently, the index drops in
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price, and one morning the writer of this put option finds that he has been assigned
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(as of the previous day, as is the case with stock options). If the index closed at 157.58
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on the previous day, then the option writer's account will be debited an amount equal
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to $100 X (165.00 - 157.58) = $742.
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EUROPEAN VERSUS AMERICAN EXERCISE
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Before proceeding with more examples of index option exercise and the accompany
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ing strategies, it is necessary to introduce two new definitions. American exercise
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means that an option may he exercised at any time; European exercise means that an
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option may only be exercised on its expiration day. Many of the cash-based index |