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# Derivatives PowerPoint PPT Presentation

Derivatives. Lecture 20. Futures Options. Overview A Futures Contract on an Option The underlying asset is not a stock The underlying asset is a futures contract Call Futures Option Long Call = The right to long a futures contract Short Call = The obligation to short a futures contract

Derivatives

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## Derivatives

Lecture 20

### Futures Options

Overview

• A Futures Contract on an Option

• The underlying asset is not a stock

• The underlying asset is a futures contract

• Call Futures Option

• Long Call = The right to long a futures contract

• Short Call = The obligation to short a futures contract

• Put Futures Option

• Long Put = The right to short a futures contract

• Short Put = The obligation to long a futures contract

### Futures Options

Option Specifications

• Futures Options = FO

• No delivery occurs

• Commodities are Settled in Cash

• Financials might take delivery

• One option = one futures contract

• Expiration

• Financial options

• Same date as futures contract expiration

• Commodity Options

• Expire the month prior to the futures contract expiration

### Futures Options

Pricing

• FO prices are listed in “units”

• Each “Unit” has a \$ value

Example (Corn FO)

• Underlying asset = 5,000 bushels of corn

• 1 unit = \$6.25 (or 1/8 cents per bushel)

• Dec300Call = 80

• 80 x \$6.25 = \$500

• The strike of 300 = \$3.00 or 300 cents per bushel

• CBOT lists details

### Futures Options

Example (Soybean FO)

• March soybean futures are selling for 575 cents per bushel

• The underlying asset is one futures contract on 5,000 bushels of soybeans as listed on the CBOT

• The value of one futures contract

• 5000 x \$5.75 = \$28,750

• The unit value is \$50

• Determined 5000 x .01 = \$50

• The futures option price is quoted in Units (which are cents per bushel)

• But the total price is \$50 x cents

### Futures Options

Example (Soybean FO) - continued

• Mar525P = 5 (total cost = \$50 x 5 = \$250)

• Mar550C = 35.50(\$1,775)

• Mar600C = 8.25(\$ 412.50)

• BE on March550C = 550 + 35.50 = 585.50

### Futures Options

Units

• Vary depending on the underlying asset

• Each asset has a unique relationship among

• Asset price

• Futures Contract specs

• Option

Basic Underlying Asset Categories

• Commodity

• Financial

• Currency

• others

### Futures Options

Example - gold is quoted in \$ per ounce

Example - Sugar is quoted in cents per pound

CBOT web site

Pricing – Same as regular options.

Black Scholes

Binomial

### Futures Options

FO Margin

• Determined by volatility and risk of loss

• Futures Options use unique margin accounting

• SPAN= Standard Portfolio ANalysis of Risk

Futures Options Uses

Same as futures w/ flexibility