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Derivatives

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

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Derivatives

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  1. Derivatives Lecture 20

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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 Floors, ceilings, spreads, etc Employs all Option strategies Arbitrage (lots of mispricing)

  10. Futures Options Strategies • Class Brain storm

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