Learn about the uses and risks of buying options on futures contracts. A book to provide information about the futures industry to potential investors. This booklet has been prepared as a part of NFA’s continuing public education efforts to provide information about the futures industry to potential investors. To download the free futures options trading report, visit:https://www.cannontrading.com/tools/education-futures-options-trading-101
An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before the expiration date. There are call and put options. A call option allows buying the asset, while a put option allows selling the asset. The buyer pays a premium to the seller for this right. The profit/loss of the buyer and seller depends on whether the option expires in or out of the money. The buyer's potential profit is unlimited but their loss is limited to the premium paid, whereas for the seller the potential loss is unlimited but profit is limited to the premium received.
This document provides an overview of options basics, including: types of options (calls and puts), components (strike price, premium, intrinsic/time value), risk factors, and strategies (long/short calls and puts). It also defines key Greeks like delta, gamma, vega, and theta that measure an option's sensitivity to changes in the underlying asset price, volatility, and time to expiration.
The document discusses various financial instruments in India including the capital market, money market, stock exchanges, commodity exchanges, derivatives such as futures, forwards and options. It provides details on the key features and differences between these instruments such as forwards being a private agreement while futures are exchange-traded and standardized. It also discusses concepts like margin requirements, order types and players in the financial markets like hedgers, speculators and arbitrageurs.
1) Buying call options allows investors to speculate on a rise in the price of the underlying stock or manage risk. The buyer pays a premium for the right to purchase the stock at a set strike price.
2) Strategy #1 involves buying calls to speculate, paying $1,000 in premiums for calls with a $55 strike price hoping to sell them at a profit if the stock rises above $55 before expiration.
3) Strategy #2 involves buying calls to manage risk, protecting a fund manager's planned stock purchase from increases above the $55 strike price before receiving funds in December.
The document provides information on the futures trade process and differences between open outcry and electronic trading. In open outcry trading, brokers take orders in trading pits and execute trades through verbal communication or hand signals. In electronic trading, customers send orders directly to an electronic marketplace and trades are executed by traders accepting bids and offers on computer screens. Electronic trading allows greater price insight and faster trade execution and information dissemination.
1. SEBI is launching European-style commodity options in India, beginning with gold options. Unlike equity options which settle at the spot price, commodity options will settle at the futures price on expiry.
2. Options provide a cheaper alternative to futures contracts for hedging and speculation. They allow buyers limited risk for unlimited profit potential by paying an upfront premium to the option seller.
3. While options may increase participation and market liquidity, the impact may be limited without broad institutional participation which is currently restricted. Options will facilitate risk management for producers and speculation.
Options are becoming increasingly mainstream. As their use has grown, so have the opportunities to add convenience and flexibility to property transactions.
In this presentation our experts delve into everything you need to know about how, when and why to use put and call options.
This document provides an overview of options strategies. It defines derivatives and describes how they derive value from underlying assets. Common types of derivatives are discussed including futures and options. Basic option positions like calls and puts are explained. Popular options strategies like bull call spreads, bear put spreads, and butterfly spreads are defined and examples are provided to illustrate how the payoffs work. Long straddles and short straddles are also introduced as strategies used when volatility is expected to increase or decrease. Key option terms are defined throughout like premium, strike price, expiration date, and different option types.
An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before the expiration date. There are call and put options. A call option allows buying the asset, while a put option allows selling the asset. The buyer pays a premium to the seller for this right. The profit/loss of the buyer and seller depends on whether the option expires in or out of the money. The buyer's potential profit is unlimited but their loss is limited to the premium paid, whereas for the seller the potential loss is unlimited but profit is limited to the premium received.
This document provides an overview of options basics, including: types of options (calls and puts), components (strike price, premium, intrinsic/time value), risk factors, and strategies (long/short calls and puts). It also defines key Greeks like delta, gamma, vega, and theta that measure an option's sensitivity to changes in the underlying asset price, volatility, and time to expiration.
The document discusses various financial instruments in India including the capital market, money market, stock exchanges, commodity exchanges, derivatives such as futures, forwards and options. It provides details on the key features and differences between these instruments such as forwards being a private agreement while futures are exchange-traded and standardized. It also discusses concepts like margin requirements, order types and players in the financial markets like hedgers, speculators and arbitrageurs.
1) Buying call options allows investors to speculate on a rise in the price of the underlying stock or manage risk. The buyer pays a premium for the right to purchase the stock at a set strike price.
2) Strategy #1 involves buying calls to speculate, paying $1,000 in premiums for calls with a $55 strike price hoping to sell them at a profit if the stock rises above $55 before expiration.
3) Strategy #2 involves buying calls to manage risk, protecting a fund manager's planned stock purchase from increases above the $55 strike price before receiving funds in December.
The document provides information on the futures trade process and differences between open outcry and electronic trading. In open outcry trading, brokers take orders in trading pits and execute trades through verbal communication or hand signals. In electronic trading, customers send orders directly to an electronic marketplace and trades are executed by traders accepting bids and offers on computer screens. Electronic trading allows greater price insight and faster trade execution and information dissemination.
1. SEBI is launching European-style commodity options in India, beginning with gold options. Unlike equity options which settle at the spot price, commodity options will settle at the futures price on expiry.
2. Options provide a cheaper alternative to futures contracts for hedging and speculation. They allow buyers limited risk for unlimited profit potential by paying an upfront premium to the option seller.
3. While options may increase participation and market liquidity, the impact may be limited without broad institutional participation which is currently restricted. Options will facilitate risk management for producers and speculation.
Options are becoming increasingly mainstream. As their use has grown, so have the opportunities to add convenience and flexibility to property transactions.
In this presentation our experts delve into everything you need to know about how, when and why to use put and call options.
This document provides an overview of options strategies. It defines derivatives and describes how they derive value from underlying assets. Common types of derivatives are discussed including futures and options. Basic option positions like calls and puts are explained. Popular options strategies like bull call spreads, bear put spreads, and butterfly spreads are defined and examples are provided to illustrate how the payoffs work. Long straddles and short straddles are also introduced as strategies used when volatility is expected to increase or decrease. Key option terms are defined throughout like premium, strike price, expiration date, and different option types.
OptionWin - Financial portal dedicated to the Indian stock and index options. Largely covers option spread strategies and scans the market for trading opportunities.
Financial derivatives are financial instruments linked to an underlying asset or indicator. Derivatives allow parties to trade financial risks independently from owning the underlying asset. There are several types of derivatives, including futures, forwards, options, and swaps. Futures are standardized forward contracts traded on an exchange. Options give the holder the right but not obligation to buy or sell the underlying asset. Swaps involve exchanging cash flows between two parties over time based on a notional principal amount. Derivatives are used by hedgers, speculators, and arbitrageurs to manage risk, seek profit, and exploit pricing discrepancies.
This document provides an overview of derivatives and the capital markets in India. It defines key terms like the primary and secondary markets, stock exchanges, indices, and types of derivatives like forwards, futures, options, and swaps. It describes the functions and objectives of derivatives for hedging risk and speculation. The history of derivatives trading in India is summarized, along with the major participants like hedgers, speculators, and arbitrageurs.
Derivatives futures,options-presentation-hareeshHareesh M
This document defines and explains various types of derivatives contracts including futures, options, forwards, and swaps. It describes how futures and options are traded on exchanges versus over-the-counter markets. Key terms like underlying assets, strike price, and expiration date are defined for different derivative products. Economic benefits of using derivatives for hedging and speculation are also summarized.
The document provides an introduction to derivatives markets. It defines derivatives as financial instruments whose value is derived from an underlying asset. It describes different types of derivatives including futures, forwards, options, and swaps. It explains how these derivatives can be used for hedging, speculation, and arbitrage. It also discusses major derivatives exchanges and over-the-counter markets.
DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKETSudharshanE1
DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET.A cash market is a marketplace for the immediate settlement of transactions involving commodities and securities.
Options Presentation Introduction to Corporate Financemuratcoskun
This document provides an introduction to corporate finance options, including:
1. A brief history of options and their evolution over time from ancient Greece to modern markets.
2. An overview of the key characteristics of options contracts, including the types of options (calls, puts), how they are valued, and common strategies (bullish, bearish, neutral).
3. Examples of how options work from the perspective of buyers and sellers, including payoffs and breakeven points. Valuation methods like the binomial tree approach are also introduced.
This document defines derivatives and describes the key types of derivatives: forwards, futures, and options. It explains that derivatives derive their value from underlying assets like equities, debt, currencies, or indices. Forwards involve a private agreement to buy/sell an asset at a future date at a pre-agreed price. Futures are standardized contracts traded on exchanges that require margin from both parties. Options provide the right but not obligation to buy/sell an asset at a strike price by a specified date for a premium.
The objective of this project is to provide the reader with knowledge of the various equity option strategies used today that are applicable in different market situations.
The document discusses options contracts, including the key parties (buyer and seller), types of options (calls and puts), how option value is determined, and examples of calculating profit and loss for option buyers and sellers. It also defines important option terms and describes the main types of options - stock options, index options, currency options, and futures options.
Derivatives are financial instruments whose value is dependent on an underlying asset. The three main types of derivatives are forwards, futures, and options. Forwards and futures are contracts to buy or sell an asset at a future date at a predetermined price, while options provide the right but not obligation to buy or sell an asset at a strike price. Derivatives allow traders to hedge risk, reduce transaction costs, manage portfolios, and enhance liquidity in markets.
Derivatives derive their value from underlying assets such as stocks, commodities, currencies, and bonds. The main types of derivatives are forwards, futures, and options. Forwards involve an obligation for both parties to fulfill the contract terms at a future date. Futures are standardized contracts traded on an exchange with high liquidity. Options confer the right but not obligation to buy or sell the underlying asset at a strike price by an expiry date. Key participants in derivatives markets include speculators, hedgers, and arbitrageurs. Common derivatives strategies involve futures arbitrage, hedging, and using options spreads. Greeks like delta and gamma help analyze how option prices change with movements in the underlying asset.
Risk Management Using Derivatives in Financial Planning Journal by Gaurav K B...Corporate Professionals
Derivatives can be used effectively for risk management purposes such as hedging currency, commodity price, interest rate, and credit risks. Key points:
1) Derivatives like forwards, futures, options and swaps allow companies to hedge existing exposures to financial risks.
2) The right risk management techniques need to be used, as derivatives can reduce risks but improper use may increase risks.
3) Different derivative products are suited to different risk exposures. For example, currency risks are best hedged with forwards or options, while interest rate risks can be managed using interest rate swaps.
characterstics of derivative market instruments power point presentationaditya singh
This document discusses various derivative market instruments, including their characteristics. It describes forward contracts as bilateral agreements to buy or sell an asset at a future time for a set price, exposing the parties to counterparty risk. Futures contracts are exchange-traded agreements to buy or sell an asset at a future date for a set price. Options contracts give the buyer the right, but not obligation, to buy or sell an asset at a strike price by an expiration date in exchange for an upfront premium. Swaps involve the exchange of financial instruments between two parties based on a net payment amount at settlement dates until the final termination date.
This document defines and explains options contracts. It discusses that an options contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an asset at a future date at an agreed upon price. It outlines key features of options contracts including the underlying instrument, contract size, premium, strike price, and expiration date. It also defines put and call options and discusses concepts like moneyness, intrinsic and time value, and examples of calculating these values. Finally, it covers advantages like making money and hedging risk, and disadvantages like options being a wasting asset and complexity.
The document provides an overview of derivatives, including their basic uses and types. Derivatives are financial instruments whose value is based on an underlying asset. They are used for hedging risk exposure and speculation. Common types of derivatives include futures, forwards, options, and swaps. Options give the buyer the right but not obligation to buy or sell an asset, while futures and forwards require the exchange of the asset. Swaps involve exchanging cash flows over time, such as interest rates or currencies.
Derivatives are financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. There are three main types of derivatives: futures and forwards, which are contracts to buy or sell an asset on a future date; options, which give the owner the right but not obligation to buy or sell an asset; and swaps, which involve exchanging cash flows of one party's financial instrument for those of another party. Derivatives offer benefits like speculation, hedging risk, leverage, and flexibility, but also carry risks such as credit risk, potential for crimes, and impacting the leverage of an economy's debt.
The document discusses various types of derivatives instruments used to manage financial risk, including forwards, futures, options, and swaps. It provides examples of how these derivatives are used to hedge risks related to commodities, interest rates, currencies, equities, indexes, and other underlying assets. The key types of derivatives discussed are over-the-counter contracts and exchange-traded contracts, along with examples of each like forwards, futures, and options.
Derivatives are financial instruments whose value is based on an underlying asset. There are several types of derivatives including options, futures, swaps, and warrants. Options give the holder the right but not obligation to buy or sell the underlying asset. Warrants are similar to options and allow holders to purchase stock from the issuing company at a specified price. Derivatives can be used for hedging risk, speculation, and gaining leverage. They are valued using models like Black-Scholes or by their market price on exchanges.
1. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
2. Options have both buyers and writers, with buyers paying premiums for the rights conveyed and writers receiving premiums in exchange for taking on obligations.
3. The key factors that determine an option's premium are the underlying asset's price, the strike price, time to expiration, and expected volatility.
This document provides an introduction and overview of derivatives, including their history, types, and uses. It discusses futures, forwards, and options contracts. Futures are exchange-traded standardized contracts that require daily margin payments and settlement. Forwards are over-the-counter customized contracts that involve credit risk. Options provide the right but not obligation to buy or sell an underlying asset at a specified price on or before expiration. The document defines call and put options and explores factors that influence option pricing.
OptionWin - Financial portal dedicated to the Indian stock and index options. Largely covers option spread strategies and scans the market for trading opportunities.
Financial derivatives are financial instruments linked to an underlying asset or indicator. Derivatives allow parties to trade financial risks independently from owning the underlying asset. There are several types of derivatives, including futures, forwards, options, and swaps. Futures are standardized forward contracts traded on an exchange. Options give the holder the right but not obligation to buy or sell the underlying asset. Swaps involve exchanging cash flows between two parties over time based on a notional principal amount. Derivatives are used by hedgers, speculators, and arbitrageurs to manage risk, seek profit, and exploit pricing discrepancies.
This document provides an overview of derivatives and the capital markets in India. It defines key terms like the primary and secondary markets, stock exchanges, indices, and types of derivatives like forwards, futures, options, and swaps. It describes the functions and objectives of derivatives for hedging risk and speculation. The history of derivatives trading in India is summarized, along with the major participants like hedgers, speculators, and arbitrageurs.
Derivatives futures,options-presentation-hareeshHareesh M
This document defines and explains various types of derivatives contracts including futures, options, forwards, and swaps. It describes how futures and options are traded on exchanges versus over-the-counter markets. Key terms like underlying assets, strike price, and expiration date are defined for different derivative products. Economic benefits of using derivatives for hedging and speculation are also summarized.
The document provides an introduction to derivatives markets. It defines derivatives as financial instruments whose value is derived from an underlying asset. It describes different types of derivatives including futures, forwards, options, and swaps. It explains how these derivatives can be used for hedging, speculation, and arbitrage. It also discusses major derivatives exchanges and over-the-counter markets.
DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKETSudharshanE1
DIFFERENCE BETWEEN CASH MARKET AND DERIVATIVES MARKET.A cash market is a marketplace for the immediate settlement of transactions involving commodities and securities.
Options Presentation Introduction to Corporate Financemuratcoskun
This document provides an introduction to corporate finance options, including:
1. A brief history of options and their evolution over time from ancient Greece to modern markets.
2. An overview of the key characteristics of options contracts, including the types of options (calls, puts), how they are valued, and common strategies (bullish, bearish, neutral).
3. Examples of how options work from the perspective of buyers and sellers, including payoffs and breakeven points. Valuation methods like the binomial tree approach are also introduced.
This document defines derivatives and describes the key types of derivatives: forwards, futures, and options. It explains that derivatives derive their value from underlying assets like equities, debt, currencies, or indices. Forwards involve a private agreement to buy/sell an asset at a future date at a pre-agreed price. Futures are standardized contracts traded on exchanges that require margin from both parties. Options provide the right but not obligation to buy/sell an asset at a strike price by a specified date for a premium.
The objective of this project is to provide the reader with knowledge of the various equity option strategies used today that are applicable in different market situations.
The document discusses options contracts, including the key parties (buyer and seller), types of options (calls and puts), how option value is determined, and examples of calculating profit and loss for option buyers and sellers. It also defines important option terms and describes the main types of options - stock options, index options, currency options, and futures options.
Derivatives are financial instruments whose value is dependent on an underlying asset. The three main types of derivatives are forwards, futures, and options. Forwards and futures are contracts to buy or sell an asset at a future date at a predetermined price, while options provide the right but not obligation to buy or sell an asset at a strike price. Derivatives allow traders to hedge risk, reduce transaction costs, manage portfolios, and enhance liquidity in markets.
Derivatives derive their value from underlying assets such as stocks, commodities, currencies, and bonds. The main types of derivatives are forwards, futures, and options. Forwards involve an obligation for both parties to fulfill the contract terms at a future date. Futures are standardized contracts traded on an exchange with high liquidity. Options confer the right but not obligation to buy or sell the underlying asset at a strike price by an expiry date. Key participants in derivatives markets include speculators, hedgers, and arbitrageurs. Common derivatives strategies involve futures arbitrage, hedging, and using options spreads. Greeks like delta and gamma help analyze how option prices change with movements in the underlying asset.
Risk Management Using Derivatives in Financial Planning Journal by Gaurav K B...Corporate Professionals
Derivatives can be used effectively for risk management purposes such as hedging currency, commodity price, interest rate, and credit risks. Key points:
1) Derivatives like forwards, futures, options and swaps allow companies to hedge existing exposures to financial risks.
2) The right risk management techniques need to be used, as derivatives can reduce risks but improper use may increase risks.
3) Different derivative products are suited to different risk exposures. For example, currency risks are best hedged with forwards or options, while interest rate risks can be managed using interest rate swaps.
characterstics of derivative market instruments power point presentationaditya singh
This document discusses various derivative market instruments, including their characteristics. It describes forward contracts as bilateral agreements to buy or sell an asset at a future time for a set price, exposing the parties to counterparty risk. Futures contracts are exchange-traded agreements to buy or sell an asset at a future date for a set price. Options contracts give the buyer the right, but not obligation, to buy or sell an asset at a strike price by an expiration date in exchange for an upfront premium. Swaps involve the exchange of financial instruments between two parties based on a net payment amount at settlement dates until the final termination date.
This document defines and explains options contracts. It discusses that an options contract is an agreement that gives the buyer the right, but not the obligation, to buy or sell an asset at a future date at an agreed upon price. It outlines key features of options contracts including the underlying instrument, contract size, premium, strike price, and expiration date. It also defines put and call options and discusses concepts like moneyness, intrinsic and time value, and examples of calculating these values. Finally, it covers advantages like making money and hedging risk, and disadvantages like options being a wasting asset and complexity.
The document provides an overview of derivatives, including their basic uses and types. Derivatives are financial instruments whose value is based on an underlying asset. They are used for hedging risk exposure and speculation. Common types of derivatives include futures, forwards, options, and swaps. Options give the buyer the right but not obligation to buy or sell an asset, while futures and forwards require the exchange of the asset. Swaps involve exchanging cash flows over time, such as interest rates or currencies.
Derivatives are financial instruments whose value is based on an underlying asset such as a stock, bond, commodity, or currency. There are three main types of derivatives: futures and forwards, which are contracts to buy or sell an asset on a future date; options, which give the owner the right but not obligation to buy or sell an asset; and swaps, which involve exchanging cash flows of one party's financial instrument for those of another party. Derivatives offer benefits like speculation, hedging risk, leverage, and flexibility, but also carry risks such as credit risk, potential for crimes, and impacting the leverage of an economy's debt.
The document discusses various types of derivatives instruments used to manage financial risk, including forwards, futures, options, and swaps. It provides examples of how these derivatives are used to hedge risks related to commodities, interest rates, currencies, equities, indexes, and other underlying assets. The key types of derivatives discussed are over-the-counter contracts and exchange-traded contracts, along with examples of each like forwards, futures, and options.
Derivatives are financial instruments whose value is based on an underlying asset. There are several types of derivatives including options, futures, swaps, and warrants. Options give the holder the right but not obligation to buy or sell the underlying asset. Warrants are similar to options and allow holders to purchase stock from the issuing company at a specified price. Derivatives can be used for hedging risk, speculation, and gaining leverage. They are valued using models like Black-Scholes or by their market price on exchanges.
1. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
2. Options have both buyers and writers, with buyers paying premiums for the rights conveyed and writers receiving premiums in exchange for taking on obligations.
3. The key factors that determine an option's premium are the underlying asset's price, the strike price, time to expiration, and expected volatility.
This document provides an introduction and overview of derivatives, including their history, types, and uses. It discusses futures, forwards, and options contracts. Futures are exchange-traded standardized contracts that require daily margin payments and settlement. Forwards are over-the-counter customized contracts that involve credit risk. Options provide the right but not obligation to buy or sell an underlying asset at a specified price on or before expiration. The document defines call and put options and explores factors that influence option pricing.
- Derivative contracts derive their value from an underlying asset and allow investors to speculate on price movements without owning the asset. Common derivatives include futures, options, swaps, and forwards.
- An options contract gives the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined strike price by a certain expiration date. Options provide flexibility and can be used to take advantage of price changes or protect against losses.
- Key terms related to options include the strike price, which remains fixed, and moneyness, which describes the relationship between the strike price and current market price. Factors like time to expiration and volatility also impact options pricing.
Options are financial derivatives that provide the right, but not obligation, to buy or sell an underlying asset at a predetermined price. There are two main types of options: calls, which give the right to buy, and puts, which give the right to sell. Options provide leverage, hedging opportunities, and profits with lower risk than buying the underlying asset. Key terms include strike price, expiration date, premium, open interest, in/out/at the money, implied volatility, and assignment. Greeks like delta, gamma, vega and theta measure how an option's price changes with the underlying asset price, volatility, and time. Implied volatility estimates future volatility based on option prices.
1. The document discusses various derivatives trading concepts such as futures contracts, forward contracts, and options. It explains that futures contracts are standardized agreements to buy or sell an asset at a specified price on a future date, while forward contracts are customized agreements with physical delivery of the asset.
2. Options are described as contracts that give the buyer the right but not the obligation to buy or sell an asset at a specified price on or before the expiration date. The main types are calls, which are rights to buy, and puts, which are rights to sell.
3. Participants in futures markets are identified as hedgers who protect their positions, speculators who take risks seeking profits, and arbitrageurs who exploit
This document provides an introduction to option contracts, including definitions, key features, advantages and disadvantages, and types of options. It discusses call and put options, as well as European and American options. Key terminology for options like long, short, strike price, in-the-money, out-of-the-money, and at-the-money are also explained. The document is intended to provide a basic understanding of stock options and how they can be used.
To become a good Options investor, understanding the basic fundamentals and its pricing is key. In this session, we will discuss fundamentals of Options. This is an opportunity for beginners to ask the most basic questions on the working of CALL/PUT options and we will also put on trades (on a demo account).
We will discuss risks of buying and writing Options.
We can then talk about basic strategies involving single CALL/PUT contracts. We will see why writing PUTS can be so rewarding; so much so that Warren Buffet prefers selling PUT options.
This document discusses currency options. It defines a currency option as a financial derivative that gives the buyer the right to buy or sell a currency at a specified exchange rate during a specified period of time. There are two types of currency options: put options, which give the right to sell one currency and receive another, and call options, which give the right to buy one currency with another. Currency options provide advantages like limiting risk to the premium paid and allowing profits from favorable exchange rate movements, but they also have disadvantages like losing the full premium if the option expires out of the money or is terminated early.
This document discusses currency options. It defines a currency option as a financial derivative that gives the buyer the right to buy or sell a currency at a specified exchange rate during a specified period of time. There are two types of currency options: put options, which give the right to sell one currency and receive another, and call options, which give the right to buy one currency with another. Currency options provide advantages like limiting risk to the premium paid and allowing profits from favorable exchange rate movements, but they also have disadvantages like losing the full premium if the option expires out of the money or is terminated early.
1. The document discusses various types of derivatives including equity derivatives, forwards, futures, options, swaps, and warrants.
2. It explains the key features and differences between these derivatives, such as how forwards are customized contracts while futures are exchange-traded standardized contracts.
3. The roles of various participants in the derivatives markets are discussed, including hedgers who use derivatives to mitigate risk, speculators who take on risk to profit from price movements, and arbitrageurs who seek to profit from temporary price discrepancies.
Derivatives - Basics of Derivatives contract covered in this pptSundar B N
Derivatives - Basics of Derivatives including forward, futures, swap and options contracts which covers HISTORY OF DERIVATIVES, CHARACTERISTICS OF DERIVATIVES , FEATURES OF DERIVATIVES, FUNCTIONS OF DERIVATIVES MARKET, USES OF DERIVATIVES, DIFFERENCE BETWEEN SHARES AND DERIVATIVES SHARES DERIVATIVES, DEFINITION OF UNDERLYING ASSET, DERIVATIVES ADVANTAGES AND DISADVANTAGES, PARTICIPANTS/ TRADERS IN DERIVATIVES MARKET, SPECULATORS, ARBITRAGEURS, HEDGER
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Estimation of nifty spot price using put call parity (final)Kushal Jain
This document provides an introduction to estimating the NIFTY spot price using put-call parity in the Indian market. It discusses the authors, Kushal Jain and Brajesh Kumar, and provides an abstract that outlines using 4 months of daily NIFTY options data from August to November 2011 to calculate estimated spot prices and compare them to actual prices to understand the information content of near-month and at-the-money options.
14 Option MarketsCHAPTER OBJECTIVESThe specific objectives of .docxaulasnilda
14 Option Markets
CHAPTER OBJECTIVES
The specific objectives of this chapter are to:
· ▪ provide a background on options,
· ▪ explain why stock option premiums vary,
· ▪ explain how stock options are used to speculate,
· ▪ explain how stock options are used to hedge,
· ▪ explain the use of stock index options, and
· ▪ explain the use of options on futures.
14-1 BACKGROUND ON OPTIONS
Options are classified as calls or puts. A call option grants the owner the right to purchase a specified financial instrument (such as a stock) for a specified price (called the exercise price or strike price) within a specified period of time.
A call option is said to be in the money when the market price of the underlying security exceeds the exercise price, at the money when the market price is equal to the exercise price, and out of the money when it is below the exercise price.
The second type of option is known as a put option. It grants the owner the right to sell a specified financial instrument for a specified price within a specified period of time. As with call options, owners pay a premium to obtain put options. They can exercise the options at any time up to the expiration date but are not obligated to do so.
A put option is said to be “in the money” when the market price of the underlying security is below the exercise price, “at the money” when the market price is equal to the exercise price, and “out of the money” when it exceeds the exercise price.
Call and put options specify 100 shares for the stocks to which they are assigned. Premiums paid for call and put options are determined by the participants engaged in trading. The premium for a particular option changes over time as it becomes more or less desirable to traders.
Participants can close out their option positions by making an offsetting transaction. For example, purchasers of an option can offset their positions at any time by selling an identical option. The gain or loss is determined by the premium paid when purchasing the option versus the premium received when selling an identical option. Sellers of options can close out their positions at any time by purchasing an identical option.
WEB
www.cboe.com
The volume of calls versus the volume of puts are used to assess their respective popularity.
The stock options just described are known as American-style stock options. They can be exercised at any time until the expiration date. In contrast, European-style stock options can be exercised only just before expiration.
In addition to options on stocks there are options on stock indexes, which allow investors the right to buy (with a call option) or sell (with a put option) a specified stock index for a specified price up to a specified expiration date. There are also options on interest rate futures contracts, which allow investors the right to buy or sell a specified interest rate futures contract for a specified price up to a specified expiration date. Options on stoc ...
The document provides information on derivatives trading in India, including:
1) It describes the main types of derivatives - futures, options, and their classifications.
2) It outlines the benefits of trading futures and options such as hedging risks, participating in markets with leverage, and facilitating price discovery.
3) It provides details on how to start trading derivatives by opening an account with a trading member and depositing the required collateral.
The capital market deals in long-term securities with maturities over 1 year that are less liquid but offer higher returns due to more risk. The money market deals in short-term securities with maturities under 1 year that are highly liquid but offer lower returns due to less risk. Instruments in the capital market include equity, bonds, and derivatives, while the money market includes treasury bills, commercial paper, and certificates of deposit.
The document provides an introduction to financial derivatives, including forwards, futures, options, and swaps. It defines each type of derivative and provides examples. Key points covered include:
- Derivatives derive their price from an underlying asset such as a commodity, currency, bond, or stock.
- Forwards and swaps are over-the-counter (OTC) contracts while futures and options trade on exchanges.
- Common uses of derivatives include hedging risk, speculation, and arbitrage.
- Margin requirements and daily settlement help manage counterparty risk in derivatives markets.
DERIVATIVES- Basic of Call and Put options.pptxSabitaLal
The document provides an overview of options contracts, including:
- Options give the buyer the right, but not obligation, to buy or sell an underlying asset at a predetermined price (strike price) by a set expiration date.
- There are two main types of options - calls, which allow buying the underlying, and puts, which allow selling. Options can be used for hedging or speculation.
- Key features of options include the strike price, expiration date, premium price paid by the buyer, and whether they are American or European style.
This document summarizes a report on derivatives and intraday charts. It discusses future contracts, options contracts, swaps, and intraday charts. It defines key terms related to these derivatives. The report was written by Rahul Ojha for partial fulfillment of an IBS program. It also describes meeting with customers to discuss investing in future contracts through T.S. Thapar and Co.
Similar to Buying Options on Futures Contracts - A Guide to Uses and Risks (20)
Discover the Future of Dogecoin with Our Comprehensive Guidance36 Crypto
Learn in-depth about Dogecoin's trajectory and stay informed with 36crypto's essential and up-to-date information about the crypto space.
Our presentation delves into Dogecoin's potential future, exploring whether it's destined to skyrocket to the moon or face a downward spiral. In addition, it highlights invaluable insights. Don't miss out on this opportunity to enhance your crypto understanding!
https://36crypto.com/the-future-of-dogecoin-how-high-can-this-cryptocurrency-reach/
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby...Donc Test
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting, 8th Canadian Edition by Libby, Hodge, Verified Chapters 1 - 13, Complete Newest Version Solution Manual For Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Ebook Download Stuvia Solution Manual For Financial Accounting 8th Canadian Edition Pdf Solution Manual For Financial Accounting 8th Canadian Edition Pdf Download Stuvia Financial Accounting 8th Canadian Edition Pdf Chapters Download Stuvia Financial Accounting 8th Canadian Edition Ebook Download Stuvia Financial Accounting 8th Canadian Edition Pdf Financial Accounting 8th Canadian Edition Pdf Download Stuvia
South Dakota State University degree offer diploma Transcriptynfqplhm
办理美国SDSU毕业证书制作南达科他州立大学假文凭定制Q微168899991做SDSU留信网教留服认证海牙认证改SDSU成绩单GPA做SDSU假学位证假文凭高仿毕业证GRE代考如何申请南达科他州立大学South Dakota State University degree offer diploma Transcript
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Buying Options on Futures Contracts - A Guide to Uses and Risks
1. Buying Options on Futures
Contracts
A Guide to Uses and Risks
This information was published by the National Futures
Association www.nfa.futures.org
2. Table of Contents
Introduction
Part One: The Vocabulary of Options Trading
Part Two: The Arithmetic of Option Premiums Intrinsic Value
Time Value
Part Three: The Mechanics of Buying and Writing Options
• Commission Charges Leverage
• The First Step: Calculate the Break-Even Price Factors Affecting the Choice of an
Option
• After You Buy an Option: What Then? Who Writes Options and Why
• Risk Caution
Part Four: A Pre-Investment Checklist
NFA Information and Resources
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
3. Buying Options on Futures Contracts: A
Guide to Uses and Risks
National Futures Association is a Congressionally authorized self-
regulatory organization of the United States futures industry. Its mission is to
provide innovative regulatory pro-grams and services that ensure futures
industry integrity, protect market participants and help NFA Members meet their
regulatory responsibilities.
This booklet has been prepared as a part of NFA’s continuing public education
efforts to provide information about the futures industry to potential investors.
Disclaimer: This brochure only discusses the most common type o f
commodity options traded in the U.S.—options on futures contracts traded
on a regulated exchange and exercisable at any time before they expire. If
you are considering trading options on the underlying commodity itself or
options that ca n only be exercised a t o r near their expiration date , ask
your broker for more information.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
4. Introduction
Although futures contracts have been traded on U.S. exchanges since 1865,
options on futures contracts were not introduced until 1982. Initially offered as
part of a government pilot program, their success eventually led to widespread
use of options on agricultural as well as financial futures contracts.
Options on futures contracts can offer a wide and diverse range of potentially
attractive in- vestment opportunities. However, options trading is a speculative
investment and should be treated as such. Even though the purchase of options
on futures contracts involves a limited risk (losses are limited to the costs of
purchasing the option), it is nonetheless possible to lose your entire
investment in a short period of time.
And for investors who sell rather than buy options, there is no limit at all to the
size of potential losses. This booklet is designed to provide you with a basic
understanding of options on futures contracts— what they are, how they work
and the opportunities (and risks) involved in trading them.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
5. The booklet consists of four parts:
Part One: The Vocabulary of Options Trading. Options investing has its own
language— words or terms you may be unfamiliar with or that have a special
meaning when used in connection with options.
Part Two: The Arithmetic of Option
Premiums. This section describes the major factors that influence option price
movements and the all-important relationship between option prices and
futures prices.
Part Three: The Mechanic s of Buying and Writing Options. This section
outlines the basic steps involved in buying and writing options, as well as the
risks involved.
Part Four: A Pre-Investment Checklist. This section lists additional steps you
should take before deciding whether to trade options on futures.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
6. Part One: The Vocabulary of Options
Trading
These are some of the major terms you should become familiar with, starting
with what is meant by an “option.”
Option An investment vehicle which gives the option buyer the right— but
not the obligation— to buy or sell a particular futures contract at a stated price
at any time prior to a specified date. There are two separate and distinct types
of options: calls and puts.
Call A call option conveys to the option buyer the right to purchase a
particular futures contract at a stated price at any time during the life of the
option.
Put A put option conveys to the option buyer the right to sell a particular
futures contract at a stated price at any time during the life of the option.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
7. Strike Price Also known as the “exercise price,” this is the stated price at which the buyer
of a call has the right to purchase a specific futures contract or at which the buyer of a put
has the right to sell a specific futures contract.
Underlying Contract - This is the specific futures contract that the option conveys the right to
buy (in the case of a call) or sell (in the case of a put).
Option Buyer - The option buyer is the per- son who acquires the rights conveyed by the
option: the right to purchase the underlying futures contract if the option is a call or the right
to sell the underlying futures contract if the option is a put.
Option Seller ( Writer) - The option seller (also known as the option writer or option grantor)
is the party that conveys the option rights to the option buyer.
Premium The “price” an option buyer pays and an option writer receives is known as the
premium. Premiums are arrived at through open competition between buyers and sellers
according to the rules of the exchange where the options are traded. A basic knowledge of
the factors that influence option premiums is important for anyone considering options
trading. The premium cost can significantly affect whether you realize a profit or incur a loss.
See “The Arithmetic of Option Premiums” on page 10.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
8. Expiration - This is the last day on which an option can be either exercised or offset. See
definition of “Offset” on page 8. Be certain you know the exact expiration date of any
option you have purchased or written. Options often expire during the month prior to
the delivery month of the underlying futures contract. Once an option has expired, it no
longer conveys any rights. It cannot be either exercised or offset. In effect, the option
rights cease to exist.
Quotations Premiums for exchange-traded options are reported daily in the business
pages of most major newspapers, as well as by a number of internet services. With an
under- standing of terms previously defined— call, put, strike price and expiration
month— it is easy to determine the premium for a particular option. Take a look at the
following quotation for gold options: Gold (100 troy ounces; $ per troy ounce)
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
9. The premium for a February gold call option with a strike price of $295 an ounce is
$4.30 an ounce. Therefore, for the 100 ounce option, the option buyer would pay a
premium of $430 and the option writer would receive a premium of $430.
Exercise - An option can be exercised only by the buyer (holder) of the option at any
time up to the expiration date.
If and when a call is exercised, the option buyer will acquire a long position in the
underlying futures contract at the option exercise price. The writer of the call to whom
the notice of exercise is assigned will acquire a short position in the underlying futures
con- tract at the option exercise price.
If and when a put is exercised, the option buyer will acquire a short position in the
underlying futures contract at the option exercise price. The writer of the put to whom
the notice of exercise is assigned will acquire a long position in the underlying futures
con- tract at the option exercise price.
Offset - An option that has been previously purchased or previously written can generally
be liquidated (offset) at any time prior to expiration by making an offsetting sale or
purchase.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
10. Most options investors choose to realize their profits or limit their losses through an
offset- ting sale or purchase. When an option is liquidated, no position is acquired in the
under- lying futures contract.
In-the-money - An option is said to be “in the money” if it is worthwhile to exercise. A
call option is in-the-money if the option exercise price is below the underlying futures
price. A put option is in-the-money if the option exercise price is above the underlying
futures price.
Example: The current market price of a particular gold futures contract is $300 an ounce.
A call is in-the-money if its exercise price is less than $300. A put is in-the-money if its
exercise price is more than $300.
The amount that an option is currently in-the-money is referred to as the option’s
intrinsic value.
At-the-money An option is said to be “at-the- money” if the underlying futures price
and the option’s exercise price are the same.
Out-of-the-money - A call option whose exercise price is above the underlying futures
price is said to be “out-of-the-money.” Similarly, a put option is “out-of-the-money” if its
exercise price is below the underlying futures price. Neither option is currently
worthwhile to exercise, and has no intrinsic value.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
11. Part Two: The Arithmetic of Option
Premiums
At the time you purchase a particular option, its premium cost may be $1,000. A
month or so later, the same option may be worth only $800 or $700 or $600.
Or it could be worth $1,200 or $1,300 or $1,400. Since an option is something
that most people buy with the intention of eventually liquidating (hopefully at a
higher price), it’s important to have at least a basic understanding of the major
fac- tors which influence the premium for a par- ticular option at a particular
time. There are two, known as intrinsic value and time value. The premium is
the sum of these.
Premium = Intrinsic Value + Time Value
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
12. Intrinsic Value
Intrinsic value is the amount of money, if any, that could currently be realized by
exercising the option at its strike price and liquidating the acquired futures position at
the present price of the futures contract.
At a time when a U.S. Treasury bond futures contract is trading at a price of 120-00, a call
option conveying the right to purchase the futures contract at a below-the-market strike
price of 115-00 would have an intrinsic value of $5,000.
As discussed on page 8, an option that currently has intrinsic value is said to be “in-the-
money”(by the amount of its intrinsic value). An option that does not currently have
intrinsic value is said to be “out-of-the-money.”
At a time when a U.S. Treasury bond futures contract is trading at 120-00, a call option
with a strike price of 123-00 would be “out-of-the-money” by $3,000.
Time Value
Options also have time value. In fact, if a given option has no intrinsic value— because
it is currently “Out-of-the-money”— its premium will consist entirely of time value.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
13. What’s “ time value?”
It’s the sum of money option buyers are presently willing to pay (and option
sellers are willing to accept)— over and above any intrinsic value the option
may have— for the specific rights that a given option conveys. It reflects, in
effect, a consensus opinion as to the likelihood of the option’s increasing in
value prior to its expiration.
The three principal factors that affect an option’s time value are:
1. Time remaining until expiration. Time value declines as the option
approaches expiration. At expiration, it will no longer have any time value.
(This is why an option is said to be a wasting asset.)
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
14. 2. Relationship between the option strike price and the current price of the
underlying futures contract. The further an option is re- moved from being
worthwhile to exercise— the further “out-of-the-money” it is— the less time
value it is likely to have.
3. Volatility - The more volatile a market is, the more likely it is that a price
change may eventually make the option worthwhile to exercise. Thus, the
option’s time value and therefore premium are generally higher in volatile
markets.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
15. Part Three: The Mechanics of Buying
and Writing Options
Commission Charges
Before you decide to buy and/or write (sell) options, you should understand the
other costs involved in the transaction— commissions and fees. Commission is the
amount of money, per option purchased or written, that is paid to the brokerage
firm for its services, including the execution of the order on the trading floor of the
exchange. The commission charge increases the cost of purchasing an option and
reduces the sum of money received from writing an option. In both cases, the
premium and the commission should be stated separately.
Each firm is free to set its own commission charges, but the charges must be fully
disclosed in a manner that is not misleading. In considering an option investment,
you should be aware that:
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
16. • Commission can be charged on a per-trade or a round-turn basis, covering both the
purchase and sale.
• Commission charges can differ significantly from one brokerage firm to another.
• Some firms have fixed commission charges (so much per option transaction) and
others charge a percentage of the option premium, usually subject to a certain
minimum charge.
• Commission charges based on a percentage of the premium can be substantial,
particularly if the option is one that has a high premium.
• Commission charges can have a major impact on your chances of making a profit. A
high commission charge reduces your potential profit and increases your potential
loss.
You should fully understand what a firm’s commission charges will be and
how they’re calculated. If the charges seem high— either on a dollar basis or as a
percentage of the option premium— you might want to seek comparison quotes from
one or two other firms. If a firm seeks to justify an unusually high com- mission charge
on the basis of its services or performance record, you might want to ask for a detailed
explanation or documentation in writing.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
17. Leverage
Another concept you need to understand concerning options trading is the
concept of leverage. The premium paid for an option is only a small percentage
of the value of the assets covered by the underlying futures contract.
Therefore, even a small change in the futures contract price can result in a
much larger percentage profit— or a much larger percentage loss— in relation
to the premium. Consider the following example:
An investor pays $200 for a 100-ounce gold call option with a strike price of
$300 an ounce at a time when the gold futures price is $300 an ounce. If, at
expiration, the futures price has risen to $303 (an increase of only one
percent), the option value will increase by $300 (a gain of 150 percent on your
original investment of $200).
But always remember that leverage is a two edged sword. In the above
example, unless the futures price at expiration had been above the option’s
$300 strike price, the option would have expired worthless, and the investor
would have lost 100 percent of his investment plus any commissions and fees.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
18. The First Step: Calculate the Break-Even Price
Before purchasing any option, it’s essential to precisely determine what the
underlying futures price must be in order for the option to be profitable at
expiration. The calculation isn’t difficult. All you need to know to figure a given
option’s break-even price is the following:
•The option’s strike price;
•The premium cost; and
•Commission and other transaction costs.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
19. Determiningthebreak-evenprice for acall option
Option strike price + (Option Commission Break-
+ premium + & transaction = even costs price)
Example: It’s January and the 1,000 barrel April crude oil futures contract is
currently trading at around $12.50 a barrel. Expecting a potentially significant
increase in the futures price over the next several months, you decide to buy
an April crude oil call option with a strike price of $13. Assume the premium
for the option is 95¢ a barrel and that the com- mission and other transaction
costs are $50, which amounts to 5¢ a barrel.
Before investing, you need to know how much the April crude oil futures price
must increase by expiration in order for the option to break even or yield a net
profit after expenses. The answer is that the futures price must increase to $14
for you to break even and to above $14 for you to realize any profit.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
20. The option will exactly break even at expiration if the futures price is $290.80 an
ounce. For each $1 an ounce the futures price is be- low $290.80 it will yield a
profit of $100.
If the futures price at expiration is above $290.80, there will be a loss. But in no
case can the loss exceed $420— the sum of the
premium ($370) plus commission and other transaction costs ($50).
Factors Affecting the Choice of an Option
If you expect a price increase, you’ll want to consider the purchase of a call
option. If you
expect a price decline, you’ll want to consider the purchase of a put option.
However, in addition to price expectations, there are two other factors that
affect the choice of option:
• The length of the option; and
• The option strike price
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
21. The length of the option
One of the attractive features of options is that they allow time for your price
expectations to be realized. The more time you allow, the greater the likelihood the
option will eventually become profitable. This could influence your decision about
whether to buy, for example, an option on a March futures con- contract or an option
on a June futures contract.
Bear in mind that the length of an option
(such as whether it has three months to expiration or six months) is an important
variable affecting the cost of the option. A longer option commands a higher
premium.
The option strike price
The relationship between the strike price of an option and the current price of the
under- lying futures contract is, along with the length of the option, a major factor
affecting the option premium. At any given time, there may be trading in options
with a half dozen or more strike prices— some of them below the current price of
the underlying futures con- tract and some of them above.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
22. A call option with a low strike price will have a higher premium cost than a call
option with a high strike price because it will more likely and more quickly become
worthwhile to exercise. For example, the right to buy a crude oil futures contract at
$11 a barrel is more valuable than the right to buy a crude oil futures contract at
$12 a barrel.
Conversely, a put option with a high exercise price will have a higher premium cost
than a put option with a low exercise price. For ex- ample, the right to sell a crude
oil futures con- tract at $12 a barrel is more valuable than the right to sell a crude
oil futures contract at $11 a barrel.
While the choice of a call option or put option will be dictated by your price
expectations, and your choice of expiration month by when you look for the
expected price change to occur, the choice of strike price is some- what more
complex. That’s because the strike price will influence not only the option’s
premium cost but also how the value of the option, once purchased, is likely to
respond to subsequent changes in the underlying futures contract price. Specifically,
options that are out-of-the-money do not normally respond to changes in the
underlying futures price the same as options that are at-the-money or in-the-
money.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
23. Generally speaking, premiums for out-of-the- money options do not reflect, on a
dollar for dollar basis, changes in the underlying futures price. The change in option
value is usually less. Indeed, a change in the underlying futures price could have
little effect, or even no effect at all, on the value of the option.
This could be the case if, for instance, the option remains deeply out-of-the-money
after the price change or if expiration is near.
If you purchase an out-of-the-money option, bear in mind that no matter how much
the futures price moves in your favor, the option will still expire worthless, and you
will lose your entire investment unless the option is in-the-money at the time of
expiration. To realize a profit, it must be in-the-money by some amount greater
than the option’s purchase costs. This is why it’s crucial to calculate an option’s
break-even price before you buy it.
Example: At a time when the March crude oil futures price is $11 a barrel, an
investor expecting a substantial price increase buys a March call option with a strike
price of $12.50. By expiration, as expected, there has been a substantial price
increase to $12.50. But since the option is still not worthwhile to exercise, it expires
worthless and the investor has lost his total investment.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
24. After You Buy an Option, What Then?
At any time prior to the expiration of an option, you can:
• Offset the option.
• Continue to hold the option.
• Exercise the option.
Offsetting the option
Liquidating an option in the same marketplace where it was bought is the most
frequent method of realizing option profits. Liquidating an option prior to its
expiration for whatever value it may still have is also a way to reduce your loss (by
recovering a portion of your in- vestment) in case the futures price hasn’t per-
formed as you expected it would, or if the price outlook has changed.
In active markets, there are usually other investors who are willing to pay for the
rights your option conveys. How much they are willing to pay (it may be more or
less than you paid) will depend on (1) the current futures price in relation to the
option’s strike price, (2) the length of time still remaining until expiration of the
option and (3) market volatility.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
25. Net profit or loss, after allowance for commission charges and other transaction
costs, will be the difference between the premium you paid to buy the option
and the premium you receive when you liquidate the option.
Example: In anticipation of rising sugar prices, you bought a call option on a sugar
futures contract. The premium cost was $950 and the commission and
transaction costs were $50. Sugar prices have subsequently risen and the option
now commands a premium of $1,250. By liquidating the option at this price,
your net gain is $250. That’s the selling price of $1,250 minus the $950
premium paid for the option minus $50 in commission and transaction costs.
Premium paid for option Premium received when option $ 950
is liquidated $ 1 ,2 5 0
Increase in premium $ 300
Less transaction costs $ 5 0
Net profit $ 250
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
26. You should be aware, however, that there is no guarantee that there will actually
be an active market for the option at the time you decide you want to liquidate. If
an option is too far removed from being worthwhile to exercise or if there is too
little time remaining until expiration, there may not be a market for the option at
any price.
Assuming, though, that there’s still an active market, the price you get when you
liquidate will depend on the option’s premium at that time. Premiums are arrived at
through open competition between buyers and sellers according to the rules of an
exchange.
Continuing to hold the option
The second alternative you have after you buy an option is to hold an option right
up to the final date for exercising or liquidating it. This means that even if the price
change you’ve anticipated doesn’t occur as soon as you expected— or even if the
price initially moves in the opposite direction— you can continue to hold the
option if you still believe the market will prove you right. If you are wrong, you will
have lost the opportunity to limit your losses through offset. On the other hand,
the most you can lose by continuing to hold the option is the sum of the premium
and transaction costs. This is why it is sometimes said that option buyers have the
advantage of staying power.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
27. You should be aware, however, options decline in value as they approach expiration.
(See “Time Value” on page 10.)
Exercising the option
You can also exercise the option at any time prior to the expiration of the option.
It does not have to be held until expiration. It is essential to understand, however,
that exercising an option on a futures contract means that you will acquire either a
long or short position in the underlying futures contract— a long futures position if
you exercise a call and a short futures position if you exercise a put.
Example: You’ve bought a call option with a strike price of 70¢ a pound on a 40,000
pound live cattle futures contract. The futures price has risen to 75¢ a pound.
Were you to exercise the option, you would acquire a long cattle futures position
at 70¢ with a “paper gain” of 5¢ a pound ($2,000). And if the futures price were to
continue to climb, so would your gain.
But there are both costs and significant risks involved in acquiring a position in the
futures market. For one thing, the broker will require a margin deposit to provide
protection against possible fluctuations in the futures price. And if the futures price
moves adversely to your position, you could be called upon— perhaps even within
hours— to make additional margin deposits.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
28. There is no upper limit to the extent of these margin calls.
Secondly, unlike an option which has limited risk, a futures position has potentially
unlimited risk. The further the futures price moves against your position, the larger
your loss.
Even if you were to exercise an option with the intention of promptly liquidating the
futures position acquired through exercise, there’s the risk that the futures price which
existed at the moment may no longer be avail- able by the time you are able to
liquidate the futures position. Futures prices can and often do change rapidly.
For all these reasons, only a small percentage of option buyers elect to realize option
trading profits by exercising an option. Most choose the alternative of having the broker
offset— i.e., liquidate— the option at its currently quoted premium value.
Who Writes Options and Why
Up to now, this booklet has discussed only the buying of options. But it stands to reason
that when someone buys an option, someone else sells it. In any given transaction, the
seller may be someone who previously bought an option and is now liquidating it. Or
the seller may be an individual who is participating in the type of investment activity
known as option writing.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
29. The attraction of option writing to some investors is the opportunity to receive the
premium that the option buyer pays. An option buyer anticipates that a change in
the option’s underlying futures price at some point in time prior to expiration will
make the option worthwhile to exercise. An option writer, on the other hand,
anticipates that such a price change won’t occur— in which event the option will
expire worthless and he will retain the entire amount of the option premium that
was received for writing the option.
Example: At a time when the March U.S. Treasury Bond futures price is 125-00, an
investor expecting stable or lower futures prices (meaning stable or higher interest
rates) earns a premium of $400 by writing a call option with a strike price of 129. If
the futures price at expiration is below 129-00, the call will expire worthless and the
option writer will retain the entire $400 premium. His profit will be that amount
less the transaction costs.
While option writing can be a profitable activity, it is also an extremely high risk
activity. In fact, an option writer has an unlimited risk. Except for the premium
received for writing the option, the writer of an option stands to lose any amount
the option is in-the-money at the time of expiration (unless he has liquidated his
option position in the meantime by making an offsetting purchase).
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
30. In the previous example, an investor earned a premium of $400 by writing a U.S.
Treasury Bond call option with a strike price of 129. If, by expiration, the futures
price has climbed above the option strike price by more than the $400
premium received, the investor will incur a loss. For instance, if the futures price
at expiration has risen to 131-00, the loss will be $1,600. That’s the $2,000
the option is in- the-money less the $400 premium received for writing the
option.
As you can see from this example, option writers as well as option buyers need
to calculate a break-even price. For the writer of a call, the break-even price is
the option strike price plus the net premium received after transaction costs.
For the writer of a put, the break-even price is the option strike price minus
the premium received after transaction costs.
An option writer’s potential profit is limited to the amount of the premium less
transaction costs. The option writer’s potential losses are unlimited. And an
option writer may need to deposit funds necessary to cover losses as often as
daily.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
31. Risk Caution
Option writing as an investment is absolutely inappropriate for anyone who
does not fully understand the nature and the extent of the risks involved and
who cannot afford the possibility of a potentially unlimited loss. It is also
possible in a market where prices are changing rapidly that an option writer
may have no ability to control the extent of his losses. Option writers should be
sure to read and thoroughly understand the Risk Disclosure Statement that is
provided to them.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
32. Part Four: A Pre-Investment Checklist
Take the time to check out any firm or individual that you don’t know through previous
experience or reputation. All firms and per- sons offering options on U. S. futures
contracts are required by law to be registered with the Commodity Futures Trading
Commission (CFTC) and to be Members of National Futures Association (NFA). You can
do this quickly, easily and without cost by accessing NFA’s Background Affiliation Status
Information Center (BASIC), located at NFA’s web site (www.nfa.futures.org). BASIC will
provide you with the firm and/or individual’s registration status as well as any disciplinary
actions taken by NFA, the CFTC or any U.S. exchanges. This same information is also
available by calling NFA toll-free at 800-621-3570.
Understand what a firm’s commission charges will be and how they’re calculated. If the
charges seem high— either on a dollar basis or as a percentage of the option premium—
you might want to seek comparison quotes from one or two other firms. If a firm seeks to
justify an unusually high commission charge on the basis of its services or performance
record, you might want to ask for a detailed explanation or documentation in writing.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
33. Calculate exactly the break-even price for any option you are considering
buying or writing. You should know the specific futures price above or below
which the option, at expiration, will be profitable.
Read and fully understand the required Risk Disclosure Statement before
making any commitment to purchase or write an option.
Learn enough about the commodity you would be investing in to have a
reasonable expectation that the necessary price change will occur prior to the
expiration of the option. Be certain you understand the risks inherent in
acquiring a futures position through the exercise of an option.
Don’t purchase an option unless you understand that you could lose your entire
investment. Don’t write an option unless you understand that option writing
involves potentially unlimited losses. And don’t make any investment
commitment unless the money you could potentially lose can legitimately
regarded as risk capital.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
34. Don’t make any investment on the basis of high-pressure sales tactics.
Reputable firms don’t operate that way. It’s far better to miss out on an
investment opportunity than to be rushed into a decision you may later regret.
And don’t make an investment that is presented to you as a sure thing. They
don’t exist!
Always seek the advice of other persons such as a knowledgeable financial
advisor, attorney or accountant before making any major investment decision.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
35. NFA Information and Resources
Information Center:
800.621.3570
World Wide Web:
http://www.nfa.futures.org
NFA’s web site offers information regarding the Association’s history and
organizational structure. NFA Members also will find the current issues of the
Member newsletter and Activity Report, Notices to Members and rule
interpretations. The investing public can download publications to help them
under- stand the commodity futures industry as well as their rights and
responsibilities as market participants. All visitors to NFA’s web site can ask
questions, make comments and order publications via e-mail.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.
36. BASIC:
http://www.nfa.futures.org/basic /about.asp Anyone with access to the Internet
is able to perform online background checks on the firms and individuals
involved in the futures industry by using NFA’s Background Affiliation Status
Information Center (BASIC). NFA, the CFTC and the U.S. futures exchanges have
supplied BASIC with information on CFTC registration, NFA membership, futures-
related disciplinary history and non-disciplinary activities such as CFTC
reparations and NFA arbitration.
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products. Past
performance is not indicative of future results.
38. For more information about options visit:
https://www.cannontrading.com/tools/education-futures-options-trading-101
Have a question? Contact Cannon Trading at:
https://www.cannontrading.com/company/contact
Or
Call us at: +1 (800) 454-9572
Thanks
Disclaimer: There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.