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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

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derivatives

Derivatives

Lecture 20

futures options
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
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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
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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
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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
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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
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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
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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

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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)