37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 503
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bearish late in the day, even after the close, he might conceivably try to exercise his
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calls to liquidate his position. The exchanges recognize that such tactics might not be
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in everyone's best interest - for example, if one waited to see how the money supply
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numbers looked on a particular evening before exercising, he would definitely have
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an advantage over the writers of those same options. The writers could no longer
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viably hedge their positions after the market had closed. In order to prevent this,
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cash-based option exercise notices are only acceptable until 5 minutes after the
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options close trading on that exchange on any given trading day ( except expiration, of
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course), in order to allow both holders and writers to be on somewhat equal footing.
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There is one more fact regarding exercise of cash-based options that will inter
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est brokerage customers, retail or institutional. Most brokerage firms will charge a
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commission for the cash-based option exercise or assignment. When index options
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were first traded, commissions were quite high. Currently, however, one should gen
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erally be paying a commission based upon the equivalent option price.
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Example: In the previous example, one exercised a ZYX Sep 160 call at expiration
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when the index closed at 175.24. This is a differential of 15.24. One should pay a
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commission as if he had sold his long calls at a price of 15.24, not on anything more.
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For writers of cash-based options, things are not so different from stock options.
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The writer is still warned of impending assignment by the fact that the option is trad
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ing at a discount. If it is not trading at a discount, it is probably not in danger of being
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assigned. Also, since there is no stock involved and therefore no dividends paid, the
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writer of a cash-based put option need only be concerned with whether the put is
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trading at a discount, not with whether it is trading at a discount to underlying price
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less the dividend, as is the case with stock options.
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Traders doing spreads in cash-based options have special worries, however.
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What may seem to be a limited-risk spread may acquire more risk than one initially
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perceived, due to early assignment of the short options in the spread. Consider the
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following example.
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Example: Suppose that an investor establishes a bearish call spread in ZYX options
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- he buys the November 160 call at a price of 1 and simultaneously sells the
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November 155 call at 3. His risk on the spread is $300 plus commissions if he has to
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pay the maximum, limited debit of $500 to buy back the spread, or so it appears.
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However, suppose that the index rises substantially in price and the spreader is
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assigned on the short side of his spread with the index at 175.24. He thus is charged
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a debit of $2,024 to "cover" each short call via the assignment: $100 times the in-the
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money amount, 175.24 - 155.00, or 20.24. He receives this assignment notice in the |