38 lines
2.7 KiB
Plaintext
38 lines
2.7 KiB
Plaintext
666 Part V: Index Options and Futures
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ker informs him one day that they are going to charge him $30 per round tum,
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payable up front, rather than $15 per side. That is the way most futures option bro
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kerage firms charge their commissions these days. Is this the same thing, $15 per side
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or $30 round turn, paid up front? No, it is not! What happens if you buy an option
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and it expires worthless? You have already paid the commission for a trade that, in
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effect, never took place. Nevertheless, there is little you can do about it, for it has
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become the industry standard to charge round-turn commission on futures options.
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In either case, commissions are negotiated to a flat rate by many traders.
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Discount futures commission merchants (i.e., brokerage houses) often attract
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business this way. In general, this method of paying commissions is to the customer's
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benefit. However, it does have a hidden effect that the option trader should pay
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attention to. This effect makes it potentially more profitable to trade options on some
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futures than on others.
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Example: A customer who buys com futures pays $30 per round turn in option com
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missions. Since corn options are worth $50 per one point (one cent), he is paying 0.60
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of a point every time he trades a corn option (30/50 = 0.60).
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Now, consider the same customer trading options on the S&P 500 futures. The
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S&P 500 futures and options are worth $250 per point. So, he is paying only 0.12 of
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a point to trade S&P 500 options (30/250 = .12).
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He clearly stands a much better chance of making money in an S&P 500 option
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than he does in a corn option. He could buy an S&P option at 5.00 and sell it at 5.20
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and make .08 points profit. However, with com options, if he buys an option at 5, he
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needs to sell it at 55/s to make money- a substantial difference between the two con
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tracts. In fact, if he is participating in spread strategies and trading many options, the
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differential is even more important.
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Position limits exist for futures options. While the limits for financial futures are
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generally large, other futures - especially agricultural ones - may have small limits.
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A large speculator who is doing spreads might inadvertently exceed a smaller limit.
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Therefore, one should check with his broker for exact limits in the various futures
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options before acquiring a large position.
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)
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OPTION MARGINS
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Futures option margin requirements are generally more logical than equity or index
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option requirements. For example, if one has a conversion or reversal arbitrage in
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place, his requirement would be nearly zero for futures options, while it could be
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quite large for equity options. Moreover, futures exchanges have introduced a better
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way of margining futures and futures option portfolios. |