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“Put” option gives the buyer the right to a short position in the futures
market. Seller or writer of the put is assigned a long position IF the
option is exercised
“Call” option give the buyer the right to a long position in the futures
market. Seller or writer of the call is assigned a short position IF the
option is exercised
Calls and Puts
Put
Call
Calls Puts
Calls Puts
Futures
Sell $7.00 Futures and Price Falls to $6.50
Gain of $.50 in Futures Loss $.50 in Cash
Net selling price $7.00
Put
Futures
Sell $7.00 Futures and Price Rises to $7.50
Gain of $.50 in Cash Loss of $.50 in Futures
Net selling price $7.00
Put
Price Rises
July 1
Price Falls
July 1
Sell July corn at $2.00 Buys July futures @ $2.00July $2.25 puts trading for
+ $.25 $.30..net = $.15 premium
diff in offset ($.30 - $.15
Net price: futures hedge = $2.20 - .20 + .25 = $2.25
Net price: options hedge = $2.20 - .20 + .15 = $2.15
Short Hedging: Futures vs. Options
Price Rise Greater Than Premium
Price Rises
July 1
Price Falls
July 1
Price Rises
July 1
July calls trading for a premium
Buy July corn at $2.35 Sell July futures @ $2.35
+ $.10 of $.23...sell call for $.23
net = $.23 -.15 = + $.08
Net price: futures hedge = $2.30 - .05 + .10 = $2.35
Net price: options hedge = $2.30 - .05 + .08 = $2.33
Price Falls
July 1
Options
Price Increases
Price Decreases
Options
Price Increases
Price Decreases
Retrading
Action
Individual buys a corn call at $2.10 for $.15 Current price is $2.10
$2.10 call price premium rises to $.25 December corn futures rises to $2.35
Individual sells the $2.10 strike price for $.25
Net is $.25- .15 -.01 brokerage fee - int. 01 = $.08
Action
Current price is $2.10
Individual buys a Dec. corn call at $2.10 for $.15
Individual exercises the call option and receives a buy corn futures rises to $2.35
December
position for the Dec. futures market at $2.10. Posts
margin of $650. Sells corn futures to offset for $2.35
____
.08 net
Options: Covered Options
Summary Considerations
1) We will use the same premium values for puts and calls for
ease of arithmetic calculation only
2) We will use the same arithmetic values for price increases
and decreases..as well as the same commodity (corn)
2) We will ignore the retrading or offsetting option and consider
the end result of call or put exercises
Writing Covered Puts w/Price Increase
Action
Options writer sells a corn put on Dec. Corn Sells December Corn futures @ $2.10
@ $2.10 strike prices for $.15 posts $650 margin
Option buyer lets options expire December corn futures rises to $2.35
Writer has premium of $.15 Writer buys corn futures @ $2.35
Net to Writer
$.15 premium
-.25 loss in futures
-.01 futures commission
-.01 interest
-.12 loss
Writing Covered Puts w/Price Decrease
Options: Choices
Action
Options writer sells a corn put on Dec. Corn Sells December Corn futures @ $2.10
@ $2.10 strike prices for $.15 posts $650 margin
$.15 premium
Writing Covered Calls w/ Price Increase
Action
Options writer sells a call on Dec. Corn Buys December Corn futures @ $2.10
@ $2.10 strike prices for $.15 posts $650 margin
$.15 premium
Writing Covered Calls w/Price Decrease
Action
Options writer sells a call on Dec. Corn Buys December Corn futures @ $2.10
@ $2.10 strike prices for $.15 posts $650 margin
$.15 premium
.10 loss in futures
+.05 profit
Writing Naked Puts w/ Price Increase
Action
December Corn futures @ $2.10
Options writer sells a put on Dec. Corn
@ $2.10 strike prices for $.15 Writer has no futures position
$.15 premium
Writing Naked Puts w/Price Decrease
Action
Options writer sells a put on Dec. December
Corn Corn futures @ $2.10
@ $2.10 strike prices for $.15 Writer has no futures position
Price Decreases to $2.00
Action
Options writer sells a call on Dec. December
Corn corn futures @ $2.10
@ $2.10 strike prices for $.15 writer has no futures position
+ $.15 premium
- . 25 futures loss
- $.15 Net loss
Writing Naked Calls w/Price Decrease
Action
Options writer sells a call on Dec. December
Corn corn futures @ $2.10
@ $2.10 strike prices for $.15 writer has no futures position
+ $.15 premium
Writing Options: Summary