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Options: Basic Definitions. “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

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Options basic definitions
Options: Basic Definitions

“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
Calls and Puts

Put

Sell (Writer)

Buy

Exercise

Long

Short

Call

Sell (Writer)

Buy

Exercise

Short

Long


Definitions
Definitions

  • “Strike Price” Specific price owner has right to buy or sell

  • “Premium” Cost of buying an option at a particular strike price

  • “In the Money” Put—futures is below strike price

  • “In the Money” Call—futures is above strike price

  • “Intrinsic Value” Difference between the underlying futures and an in the money put or call

  • “Time Value” Difference between options premium and intrinsic value


Premiums puts and calls 10 30 01
Premiums: Puts and Calls 10/30/01

Cotton: Z01 Futures at 28.92 Cents Per Pound

Calls

Puts

24.00 4.93

25.00 3.97

30.00 .35

35.00 .05

40.00 . 01

24.00 0.02

25.00 0.06

30.00 1.43

35.00 6.12

40.00 11.09


Premiums puts and calls 10 31 01
Premiums: Puts and Calls 10/31/01

Cotton: Z01 Futures at 29.90 Cents Per Pound

Calls

Puts

24.00 5.91

25.00 4.93

30.00 .68

35.00 .05

40.00 . 01

24.00 0.02

25.00 0.04

30.00 .78

35.00 5.14

40.00 10.11


Change in intrinsic and time value question
Change in Intrinsic and Time Value: Question

Cotton: Z01 Futures at 28.92 Cents Per Pound on 10/30

And 29.90 Cents Per Pound on 10/31

Calls Premium Intrinsic Time

Puts Premium Intrinsic Time

24.00 4.93 4.92 .01

25.00 3.97 3.92 .05

30.00 .35 .00 .35

35.00 .05 .00 .05

40.00 . 01 .00 .01

10/31

24.00 5.91 5.90 .01

25.00 4.93 4.90 .03

30.00 .68 .00 .68

35.00 .05 .00 .05

40.00 .01 .00 .01

24.00 .02

25.00 .06

30.00 1.43

35.00 6.12

40.00 11.09

10/31

24.00 .02

25.00 .04

30.00 .78

35.00 5.14

40.00 10.11


Change in intrinsic and time value answer
Change in Intrinsic and Time Value: Answer

Cotton: Z01 Futures at 28.92 Cents Per Pound on 10/30

And 29.90 Cents Per Pound on 10/31

Calls Premium Intrinsic Time

Puts Premium Intrinsic Time

24.00 .02 .00 .02

25.00 .06 .00 .06

30.00 1.43 1.08 .35

35.00 6.12 6.08 .06

40.00 11.09 11.08 .01

10/31

24.00 .02 .00 .02

25.00 .04 .00 .04

30.00 .78 .10 .68

35.00 5.14 5.10 .04

40.00 10.11 10.10 .09

24.00 4.93 4.92 .01

25.00 3.97 3.92 .05

30.00 .35 .00 .35

35.00 .05 .00 .05

40.00 . 01 .00 .01

10/31

24.00 5.91 5.90 .01

25.00 4.93 4.90 .03

30.00 .68 .00 .68

35.00 .05 .00 .05

40.00 .01 .00 .01


Intrinsic and time value call
Intrinsic and Time Value:Call

Underlying Futures at $2.80


Intrinsic and time value put
Intrinsic and Time Value: Put

Underlying Futures at $2.80


Futures and options hedging differences
Futures and Options: Hedging Differences

Futures- Sell Short

Options - Buy Put

Price falls - Gain from futures,

no premium

Price rises – Gain from cash

Price Locked

Price falls- Premium deducted from N.S.P.

Price rises – Let put expire, collect price differential over premium cost

Price not locked on upside


Price falls zero basis
Price Falls: Zero Basis

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

Buy $7.00 put for $.15 premium and price falls

to $6.50. Offset put for $.60 premium

Loss of $.50 in cash, gain of $.45 on options

Net selling price $6.95


Price rise zero basis
Price Rise: Zero Basis

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

Buy $7.00 put for $.15 premium and price rises

to $7.50. Let put expire

Gain of $.50 in cash market Less $.15 premium

Net selling price $7.35



Short hedging futures vs options1
Short Hedging: Futures vs. Options

Price Rise Greater Than Premium



Options put buyer seller choices
Options:Put Buyer-Seller Choices















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