36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
512 Part V: Index Options and Futures
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There are certain differences between the way futures trade and the way stocks
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trade. One difference that is extremely important to investors accustomed to dealing
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in stocks and stock options is that quotation vendors rarely show a bid and offer for
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futures. Thus, if one uses a quote machine to obtain the price of a stock he might see
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that the stock is currently 31 bid, 31.10 asked, with a last sale of 31. An active futures
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contract traded on a trading floor (which is typically the type that one would want to
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trade) virtually never shows a bid and offer, but rather shows last sale only. In addi
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tion, each sale of a stock or stock option is recorded both as to its time of execution
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and the quantity of execution. Such is not the case for futures. Only the price is
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recorded - one cannot tell how many contracts traded at the price, nor can he tell if
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there were repeated sales at that price. Where futures are traded in electronic mar
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kets, of course, the bid and offer are available for all to see, and volume may accu
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rately be recorded as well.
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OPTIONS ON INDEX FUTURES
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As we saw earlier, futures contracts allow a person dealing in a commodity to minimize
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profit fluctuations in his commodity. The mutual fund manager who sold the futures
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largely removed any possibility of further upside profit or downside loss. Options,
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however, allow a little more leeway than futures do. With the option, a person can lock
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in one side of his position, but can leave room for further profits if conditions improve.
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For example, the mutual fund manager might buy put options on the S&P 500 Index
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to hedge his downside risk, but still leave room for upside profits if the stock market
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rises. This is different from the sale of a futures contract, which locks in his profit, but
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does not leave any room for further profits if the market moves favorably.
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Options trade on many types of futures contracts. The security underlying the
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option is the futures contract having the same expiration month, not the entity under
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lying the futures contract itself. Thus, if one exercises a listed futures option, he
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receives a futures contract position, not the physical commodity.
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Example: A trader owns the ZYX futures December 165 call option (165 is the strik
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ing price). Assume the ZYX December future closed at 171.20. Both the calls and the
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futures are worth $500 per point. If the call is exercised, the trader then owns one
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ZYX December (same expiration month as the option) futures contract at a price of
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165. Since the current price is 171.20, there is a maintenance margin credit of $3,100
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in his account (500 x 6.20 points). Note that even though the option is an option on
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a future which is cash-based, the exercise provides the holder of the option with a
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futures contract position, not with cash. |