The Basics of Options

The Basics of Options

Introduction to Options The Basics of Options An option is an agreement between two parties, a buyer and a seller. In the case of futures contract options, the buyer acquires the right, but not the obligation, to buy or sell a specific futures contract at a known fixed price at any time on or before a known expiration date. There are two types of options: PUTS and CALLS. They offer opposite pricing alternatives. Each offers an opportunity to take advantage of futures price moves without actually having a futures position. A put option gives the buyer the right to sell in the underlying futures market and a call option gives the buyer the right to buy. The Basics of Options (continued) Unlike futures, after paying the option premium the buyer has no further obligation.

Purchasing options does not require margin deposits. What you can do with an option: Allow it to expire Exercise the option Offset Option premiums are determined by open outcry of bids on the trading floor of the exchange. The buyer of the option determines the delivery month and strike price he desires. CASE EXAMPLE: Put Option A producer expects to harvest 500 bales of cotton. In June, the March cotton futures is at 71 cents per pound. The producer buys a put option contract for a strike price at-the-money, at a premium of 4 cents per pound. As the cotton is coming up, the October crop report comes out and says that there will be a record cotton crop. As a result, March cotton futures crop to 60 cents per pound. The put option is now up to 11 cents per pound. The producer has the option to sell this put to someone else for a premium of 11 cents per pound. cents/pound

June: March Futures 71.00 March put premium 4.00 October: March Futures March put premium Result: March premium paid March premium received Commission charge Net gain (loss) cents/pound 60.00 11.00 cents/pound

-4.00 11.00 -1.00 6.00 CASE EXAMPLE: Call Option A producer expects to harvest 500 bales of cotton. In June, the March cotton futures are at 71 cents per pound. The producer buys a call option contract for a strike price at-the-money, at a premium of 4 cents per pound. As the cotton is coming up, the October crop report comes out and says that there will be a record cotton crop. In this case, March cotton futures drop to 60 cents per pound. The call option is now worth almost nothing.* A trader will not want a call option that allows him to buy March futures at 71 cents per pound, when he is currently able to purchase March futures at 60 cents per pound. cents/pound June: March Futures 71.00 March call premium 4.00

October: March Futures March call premium Result: March premium paid March premium received Commission charge Net gain (loss) cents/pound 60.00 0.00 cents/pound -4.00 0.00 -1.00 -5.00

*The call option will probably still have some value to it. There will still be some time value associated with the option. The option does not expire until the middle of February and March futures could still go back up increasing the price of the option. Additional Information About Options Depending on the strike price, options can be purchased one of three ways: In-the-money At-the-money Out-of-the-money Caution: if selling options, margin calls may occur if the market moves against your position. There is limited financial obligation with options. Options allow a producer to take advantage of favorable price moves and protects against unfavorable moves.

Recently Viewed Presentations

  • Engaging with Police and Crime Commissioners (PCCs) Compact

    Engaging with Police and Crime Commissioners (PCCs) Compact

    Compact Voice has also produced a briefing on the Compact and Police and Crime Commissioners which makes the case for why PCCs should engage with their local Compact.It includes information about what local Compacts are and how they can help...
  • School Board 101 - Minnetonka Schools

    School Board 101 - Minnetonka Schools

    2017-2018 Goals. Goal 1: Student Well-Being. The well-being of students is a priority for families and the District. In 2017-18, the District will create and implement a plan that supports parents' desires to have their students be socially and emotionally...
  • Model United Nations Course SCS3195 A Winter 2017

    Model United Nations Course SCS3195 A Winter 2017

    • Corporate uOttawa footer including the grey/garnet stripe and logo, with the exception of the URL which can be customized to a specific URL by following these simple steps: On the PowerPoint View tab, in the Master Views group, select...
  • Dreaming in Color

    Dreaming in Color

    ADULT EDUCATION Active Learning Constructivism Group Assignments….already! Nursing Class of 2010 - Group Assignments and Faculty Advisors Jene Hurlbut/Sue Clarren Katherine Cylke/Mary Chalfant Linda Cox/ Marlene Luna Group 1 Group 4 Group 7 Abu, Aisha 1 Alfaro-Tumilan, Veronica 1 DeJesus,...
  • Food and the Planet Tllberg Forum 2007 Hal

    Food and the Planet Tllberg Forum 2007 Hal

    How do we make public food service a driver of sustainability and health? Is there a place for family farms? How do we turn things around? together The U theory posits a new understanding of the world that no longer...
  • History Ener-Tec, Inc. was incorporated in 1978 after

    History Ener-Tec, Inc. was incorporated in 1978 after

    We only ask the customer to make visual checks on the power supply amp meter to confirm that there is current going to the cell. ... If power supply has to be returned for inspection or repair we offer a...
  • The colorimetric estimation of inorganic phosphate

    The colorimetric estimation of inorganic phosphate

    The Colorimetric Estimation of Inorganic Phosphate. A phosphate, an inorganic chemical, is a salt of phosphoric acid. It consists of one central phosphorus atom surrounded by four oxygen atoms in a tetrahedral arrangement. The phosphate ion carries a negative three...
  • Moodle An Open Source Course Management System

    Moodle An Open Source Course Management System

    Dawson College April 27th, 2018 H5P: Using an Interactive Assessment Tool in Moodle Rafael Scapin, Ph.D. Coordinator of Educational Technology