36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
680 Part V: Index Options and Futures
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Similar situations can also occur on the downside, where, if the future has traded as
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low as it can go, it is said to be "limit offered."
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As was pointed out earlier, futures options sometimes have trading limits
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imposed on them as well. This limit is of the same magnitude as the futures limit.
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Most of these are on the Chicago Board of Trade (all grains, U.S. Treasury bonds,
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Municipal Bond Index, Nikkei stock index, and silver), although currency options on
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the Chicago Mere are included as well. In other markets, options are free to trade,
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even though futures have effectively halted because they are up or down the limit.
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However, even in the situations in which futures options themselves have a trading
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limit, there may be out-of-the-money options available for trading that have not
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reached their trading limit.
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When options are still trading, one can use them to imply the price at which the
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futures would be trading, were they not at their trading limit.
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Example: August soybeans have been inflated in price due to drought fears, having
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closed on Friday at 650 ($6.50 per bushel). However, over the weekend it rains heav
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ily in the Midwest, and it appears that the drought fears were overblown. Soybeans
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open down 30 cents, to 620, down the allowable 30-cent limit. Furthermore, there
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are no buyers at that level and the August bean contract is locked limit down. No fur
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ther trading ensues.
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One may be able to use the August soybean options as a price discovery mech
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anism to see where August soybeans would be trading if they were open.
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Suppose that the following prices exist, even though August soybeans are not
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trading because they are locked limit down:
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Lost Sole Net Change
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Option Price for the Day
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August 625 call 19 - 21
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August 625 put 31 +16
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An option strategist knows that synthetic long futures can be created by buying
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a call and selling a put, or vice versa for short futures. Knowing this, one can tell what
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price futures are projected to be trading at:
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Implied Futures Price = Strike Price + Call Price - Put Price
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= 625 + 19 - 31 = 613
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With these options at the prices shown, one can create a synthetic futures posi
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tion at a price of 613. Therefore, the implied price for August soybean futures in this
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example is 613. |