Need a clue to short-term market direction? The premium between the Standard & Poor's 500 futures

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Need a clue to short-term market direction? The premium between the Standard & Poor's 500 futures"

Transcription

1 Stocks & Commodities V. 8:12 ( ): Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA Need a clue to short-term market direction? The premium between the Standard & Poor's 500 futures and the corresponding cash index may help, provided you understand how it is determined, what its theoretical (or fair) value is and how program traders use it. The S&P 500 index is based on the stock prices of 500 different companies with an aggregate market value of some 80% of the value of all stocks traded on the New York Stock Exchange. It is a capitalization weighted index; each component stock's price is multiplied by the number of common shares outstanding for that company, and the resulting market value is totaled. The total market value of all 500 firms is compared with that of the base period to derive the index price. A S&P 500 futures contract is an agreement between seller and buyer to deliver and take delivery, respectively, of a portfolio of stocks represented by the S&P 500 stock index at a specified future date. The delivery is actually a cash settlement of the difference between the original transaction price and the final price of the index at the termination of the contract. In practice, however, cash settlements occur in daily increments until the contract terminates, as the contract's trading price changes. The value of the S&P 500 futures can be calculated by multiplying the futures price by $500. For example, with a futures price of , the value of the contract is $500, or $164,255. Calculating current premium and fair value The first step in premium analysis is to calculate the current premium, which is simply the difference between the prices of the nearest S&P 500 futures contract and of the cash index. It can be calculated throughout the day in intraday trading or using daily closing prices for position trading. The corresponding closing prices can be found in most daily newspapers. (See sidebar, "WSJ futures.") Article Text Copyright (c) Technical Analysis Inc. 1

2 Stocks & Commodities V. 8:12 ( ): Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA If the futures contract that expires next is within three weeks from expiration, the next contract should be used (in our example, December). The second step is to calculate the fair value of the premium to assess whether its current value is relatively high or low. The fair value is based on the idea of arbitrage, which compares two equivalent positions in terms of risk and reward. Arbitrage takes many forms, but all attempt to profit from an aberration in price relationships. How can the arbitrageur profit if the S&P futures price gets out of line with the index? If the premium becomes too large when the futures contract becomes overvalued compared with the cash index arbitrageurs will sell the futures and buy the index (in practice, a portfolio of S&P 500 stocks). In turn, their action will bring down the futures price and raise the index price until no further future sales are warranted. Conversely, if futures prices become too cheap compared with the index, arbitrageurs will buy the futures and sell the index. This is called program trading, a much-maligned activity that in fact plays a useful role: that of preventing lasting aberrations between futures and index prices. Without program trading, the required adjustments may well be even more explosive. Program traders will prevent the premium from drifting too far from fair value by hitting the market with mammoth buy or sell orders. Futures should normally trade at a premium to the index because futures prices include the theoretical cost of the acquisition of the underlying 500 stocks of the index, potential dividend income and the time element involved. Only four future contracts are traded, expiring in March, June, September and December; the nearest contract is most frequently traded because it carries the smallest premium. For each contract, there is a premium value such that investors become indifferent between buying stocks or buying futures. This premium value is called the fair, or theoretical, value. (See sidebar, "Calculating premium fair value.") Premium levels and market sentiment Market sentiment has a major impact on premium levels. Bullish traders, anxious to establish a long position in the market, can do so faster in a single order and cheaper with lower commissions and margin requirements than by buying an assortment of stocks. Similarly, bearish traders who desire to lighten their equity investment can do so most effectively by selling a futures contract as insurance against further depreciation in the value of their stock portfolio. As a result, futures respond much faster than individual stocks to market sentiment, and the S&P premium will be generally above fair value in a bullish environment and generally below fair value in a bearish environment. Program traders, however, will prevent the premium from drifting too far from fair value by hitting the market with mammoth buy or sell orders when the premium reaches a level that makes such activities profitable. Taking into account their transaction costs, most traders will not initiate a program unless the differential between current and fair premium value exceeds some three-quarter basis point. Your broker should be Article Text Copyright (c) Technical Analysis Inc. 2

3 Figures Copyright (c) Technical Analysis Inc. 3 Stocks & Commodities V. 8:12 ( ): Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA able to give you premium fair value and tentative program trigger levels for the day, or you may get it by listening to or watching Financial News Network, which broadcasts the information throughout the day. Premium levels and day trading Day traders should observe the premium to determine whether and when program traders will act, which tends to result in violent but short-lived price swings. Trying to front-run program traders can be profitable and fun, but it is not easy due to premium volatility. At times, you will feel as though you are picking up dimes in front of a steamroller. he premium has a tendency to spike and collapse (Figure 1) When you observe consistently high values and a rising trend for the premium, expect buy programs to boost the stock market; conversely, deteriorating premium values and a sustained downtrend increase the likelihood of sell programs, which will depress the market. Premium levels and position trading Premium analysis may also help the position trader catch a few significant market moves in a year. Relatively large closing premiums (with respect to fair value) over several days reflect market bullishness and may signal future higher stock prices. Conversely, low premiums convey bearishness. When interpreting daily premium charts, keep in mind that a slight downdrift is normal, since the premium should shrink to zero by the expiration date. The most reliable clue is whether the premium is consistently above or below its daily fair value. Premium, however, is just another indicator. Don't even think of making it the sole basis for a trading decision. Jean-Olivier Fraisse, CFA, MBA, MS, is a consultant in international finance and an options trader. References Chicago Mercantile Exchange, "Using S&P 500 Stock Index Futures and Options." Fraisse, Jean-Olivier [1990]. "Measuring volatility," STOCKS & COMMODITIES, October. [1990]. "Volatility and trading," STOCKS & COMMODITIES, November.

4 Figures Copyright (c) Technical Analysis Inc. 4 Stocks & Commodities V. 8:12 ( ): Clues To Market Direction With The S&P 500 Premium by Jean-Olivier Fraisse, CFA FIGURE 1: Note the rapid sell-off when premium turned into discount the morning of 8/23. Note also how a decreasing premium the afternoon of 8/23 resulted in a weakening market as measured by the S&P chart in Figure 2 FIGURE 2: Relatively large closing premiums (Figure 1) over several days reflect market bullishness and may signal future higher stock prices. Conversely low premiums convey bearishness.

5 Stocks & Commodities V. 8:12 ( ): SIDEBAR: WSJ FUTURES WSJ FUTURES In The Wall Street Journal, you will find the closing prices of both the S&P 500 index and S&P futures in the futures table of the Index Trading Section. On August 21, 1990, the table looked like this: The S&P premium is the difference between the closing prices of the S&P 500 September futures contract (in the settle column) and the corresponding index (at the bottom of the table), for example, minus , or Copyright (c) Technical Analysis Inc.

6 Stocks & Commodities V. 8:12 ( ): SIDEBAR: CALCULATING PREMIUM FAIR VALUE CALCULATING PREMIUM FAIR VALUE A risk-averse investor wants to invest in the stock market. How does he do it without risking loss? He can borrow funds, buy a portfolio of stocks equivalent to the S&P 500 index at the price of S and simultaneously sell a S&P futures contract at a price of F. He has achieved a hedged position that is totally riskless, any depreciation in stock prices being compensated by a decrease in the value of the futures he sold. His profit is the price of the futures less the price of the index, net of carrying cost consisting of interest expense over the futures holding period (Sr, where r is the period interest), less dividend income D from the stock owned. At expiration, he will close the position by selling the stocks and delivering the cash proceeds to the futures buyers. Since the futures price is equal to the index at expiration, neither loss nor capital gain will occur at settlement. His total return will be: (F - S) + (D - Sr) The term (F - S) corresponds to the net outlay of funds to enter the position, and (D - Sr) to the carrying cost for maintaining the position. Note that F - S is also the value of the premium at the time the investor opened the position. The fair (or theoretical) value of the premium is that value of the premium that makes the investor indifferent to whether he buys stocks or buys futures. This is the case when he derives neither profit nor loss from the transaction: (F - S) + (D - Sr) = 0 The fair value premium P that makes him indifferent is thus defined by: P = Sr - D Assume, for example, that the index price S is , the annualized dividend rate for the S&P 500 stocks is 4%, and the annualized interest rate on six-month Treasury bills is 9%. Then the fair value of the premium for futures expiring in 90 days will be: P = ( ) (90/360) or P = 4.10 The calculation is based on simplistic assumptions for example, dividends are not uniformly distributed throughout the year. The logic remains the same irrespective of refinements. Copyright (c) Technical Analysis Inc.

ETF Options. Presented by The Options Industry Council 1-888-OPTIONS

ETF Options. Presented by The Options Industry Council 1-888-OPTIONS ETF Options Presented by The Options Industry Council 1-888-OPTIONS ETF Options Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET

OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET OPTION TRADING STRATEGIES IN INDIAN STOCK MARKET Dr. Rashmi Rathi Assistant Professor Onkarmal Somani College of Commerce, Jodhpur ABSTRACT Options are important derivative securities trading all over

More information

11 Option. Payoffs and Option Strategies. Answers to Questions and Problems

11 Option. Payoffs and Option Strategies. Answers to Questions and Problems 11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various

More information

Who Should Consider Using Covered Calls?

Who Should Consider Using Covered Calls? Who Should Consider Using Covered Calls? An investor who is neutral to moderately bullish on some of the equities in his portfolio. An investor who is willing to limit upside potential in exchange for

More information

Chapter 5 Option Strategies

Chapter 5 Option Strategies Chapter 5 Option Strategies Chapter 4 was concerned with the basic terminology and properties of options. This chapter discusses categorizing and analyzing investment positions constructed by meshing puts

More information

Fundamentals of Futures and Options (a summary)

Fundamentals of Futures and Options (a summary) Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.

More information

SAVI TRADING 2 KEY TERMS AND TYPES OF ORDERS. SaviTrading LLP 2013

SAVI TRADING 2 KEY TERMS AND TYPES OF ORDERS. SaviTrading LLP 2013 SAVI TRADING 2 KEY TERMS AND TYPES OF ORDERS 1 SaviTrading LLP 2013 2.1.1 Key terms and definitions We will now explain and define the key terms that you are likely come across during your trading careerbefore

More information

www.optionseducation.org OIC Options on ETFs

www.optionseducation.org OIC Options on ETFs www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,

More information

BEAR: A person who believes that the price of a particular security or the market as a whole will go lower.

BEAR: A person who believes that the price of a particular security or the market as a whole will go lower. Trading Terms ARBITRAGE: The simultaneous purchase and sale of identical or equivalent financial instruments in order to benefit from a discrepancy in their price relationship. More generally, it refers

More information

A Leveraged Portfolio Management Approach Applying The CBOE S&P 500 PutWrite Index

A Leveraged Portfolio Management Approach Applying The CBOE S&P 500 PutWrite Index A Leveraged Portfolio Management Approach Applying The CBOE S&P 500 PutWrite Index The CBOE S&P 500 PutWrite Index ( SM Index) is an index that depicts a systematic cash secured put selling investment

More information

Futures. Leverage for sophisticated traders

Futures. Leverage for sophisticated traders Futures Leverage for sophisticated traders FSR TERMINOLOGY CHANGES ASX has changed its business framework for trading, clearing and settlement. As a result there have been changes to the terminology used

More information

INTRODUCTION TO OPTIONS MARKETS QUESTIONS

INTRODUCTION TO OPTIONS MARKETS QUESTIONS INTRODUCTION TO OPTIONS MARKETS QUESTIONS 1. What is the difference between a put option and a call option? 2. What is the difference between an American option and a European option? 3. Why does an option

More information

ForRelease: February i, 1988 (202) 254-8630

ForRelease: February i, 1988 (202) 254-8630 , NEWS RELEASE Release: 2864-88 ForRelease: February i, 1988 Contact: Kate Hathaway (202) 254-8630 Washingtom--The Commodity Futures Trading Commission released today the final staff report on stock index

More information

Purpose of Selling Stocks Short JANUARY 2007 NUMBER 5

Purpose of Selling Stocks Short JANUARY 2007 NUMBER 5 An Overview of Short Stock Selling An effective short stock selling strategy provides an important hedge to a long portfolio and allows hedge fund managers to reduce sector and portfolio beta. Short selling

More information

Options CHAPTER 7 INTRODUCTION OPTION CLASSIFICATION

Options CHAPTER 7 INTRODUCTION OPTION CLASSIFICATION CHAPTER 7 Options INTRODUCTION An option is a contract between two parties that determines the time and price at which a stock may be bought or sold. The two parties to the contract are the buyer and the

More information

J. Gaspar: Adapted from Jeff Madura, International Financial Management

J. Gaspar: Adapted from Jeff Madura, International Financial Management Chapter5 Currency Derivatives J. Gaspar: Adapted from Jeff Madura, International Financial Management 5. 1 Currency Derivatives Currency derivatives are financial instruments whose prices are determined

More information

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

Hedging with Futures and Options: Supplementary Material. Global Financial Management

Hedging with Futures and Options: Supplementary Material. Global Financial Management Hedging with Futures and Options: Supplementary Material Global Financial Management Fuqua School of Business Duke University 1 Hedging Stock Market Risk: S&P500 Futures Contract A futures contract on

More information

Guide to Options Strategies

Guide to Options Strategies RECOGNIA S Guide to Options Strategies A breakdown of key options strategies to help you better understand the characteristics and implications of each Recognia s Guide to Options Strategies 1 3 Buying

More information

TREATMENT OF PREPAID DERIVATIVE CONTRACTS. Background

TREATMENT OF PREPAID DERIVATIVE CONTRACTS. Background Traditional forward contracts TREATMENT OF PREPAID DERIVATIVE CONTRACTS Background A forward contract is an agreement to deliver a specified quantity of a defined item or class of property, such as corn,

More information

Currency Derivatives Guide

Currency Derivatives Guide Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality

More information

Reading: Chapter 19. 7. Swaps

Reading: Chapter 19. 7. Swaps Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures

More information

What You Must Know About Option Spread Trading. ETFs. The Lower Risk Strategy Offering Big Potential Gains

What You Must Know About Option Spread Trading. ETFs. The Lower Risk Strategy Offering Big Potential Gains What You Must Know About Option Spread Trading ETFs The Lower Risk Strategy Offering Big Potential Gains What You Must Know About Option Spread Trading The Lower Risk Trading Strategy Offering Big Potential

More information

There are two types of options - calls and puts.

There are two types of options - calls and puts. Options on Single Stock Futures Overview Options on single Stock Futures An SSF option is, very simply, an instrument that conveys to its holder the right, but not the obligation, to buy or sell an SSF

More information

Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT

Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT Introduction to Equity Derivatives on Nasdaq Dubai NOT TO BE DISTRIUTED TO THIRD PARTIES WITHOUT NASDAQ DUBAI S WRITTEN CONSENT CONTENTS An Exchange with Credentials (Page 3) Introduction to Derivatives»

More information

Glossary of Futures Terms

Glossary of Futures Terms NATIONAL FUTURES ASSOCIATION Glossary of Futures Terms An Introduction to the Language of the Futures Industry 1 Glossary of Futures Terms: An Introduction to the Language of the Futures Industry National

More information

Buying Equity Call Options

Buying Equity Call Options Buying Equity Call Options Presented by The Options Industry Council 1-888-OPTIONS Equity Call Options Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor

More information

Investment Analysis (FIN 670) Fall 2009. Homework 2

Investment Analysis (FIN 670) Fall 2009. Homework 2 Investment Analysis (FIN 670) Fall 2009 Homework 2 Instructions: please read carefully You should show your work how to get the answer for each calculation question to get full credit The due date is Tue,

More information

An Option In the security market, an option gives the holder the right to buy or sell a stock (or index of stocks) at a specified price ( strike

An Option In the security market, an option gives the holder the right to buy or sell a stock (or index of stocks) at a specified price ( strike Reading: Chapter 17 An Option In the security market, an option gives the holder the right to buy or sell a stock (or index of stocks) at a specified price ( strike price) within a specified time period.

More information

THE POWER OF FOREX OPTIONS

THE POWER OF FOREX OPTIONS THE POWER OF FOREX OPTIONS TOPICS COVERED Option basics Call options Put Options Why trade options? Covered call Covered put Hedging your position using options How to repair a trading position THE POWER

More information

No more stock standard choices Choose Style Options

No more stock standard choices Choose Style Options No more stock standard choices Choose Style Options DERIVATIVE MARET Equity Derivatives Style Options www.jse.co.za Johannesburg Stock Exchange The Options Strategy Spectrum BEARISH NEUTRAL BULLISH write

More information

Futures Contracts. Futures. Forward Contracts. Futures Contracts. Delivery or final cash settlement usually takes place

Futures Contracts. Futures. Forward Contracts. Futures Contracts. Delivery or final cash settlement usually takes place Futures 1 Futures Contracts Forward Contracts Futures Contracts Forwards Private contract between 2 parties Not standardized Usually one specified contract date Settled at end of contract Delivery or final

More information

BASKET A collection of securities. The underlying securities within an ETF are often collectively referred to as a basket

BASKET A collection of securities. The underlying securities within an ETF are often collectively referred to as a basket Glossary: The ETF Portfolio Challenge Glossary is designed to help familiarize our participants with concepts and terminology closely associated with Exchange- Traded Products. For more educational offerings,

More information

How CFD Trading Works?

How CFD Trading Works? What are CFD s In finance, a contract for difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference

More information

Covered Calls. Benefits & Tradeoffs

Covered Calls. Benefits & Tradeoffs 748627.1.1 1 Covered Calls Enhance ETFs with Options Strategies January 26, 2016 Joe Burgoyne, OIC Benefits & Tradeoffs Joe Burgoyne Director, Options Industry Council www.optionseducation.org 2 The Options

More information

Chapter 2.3. Technical Analysis: Technical Indicators

Chapter 2.3. Technical Analysis: Technical Indicators Chapter 2.3 Technical Analysis: Technical Indicators 0 TECHNICAL ANALYSIS: TECHNICAL INDICATORS Charts always have a story to tell. However, from time to time those charts may be speaking a language you

More information

Investing in Shares Understanding Your Shares. Australian Shareholders Association Tutorial Resource Library

Investing in Shares Understanding Your Shares. Australian Shareholders Association Tutorial Resource Library Investing in Shares Understanding Your Shares Australian Shareholders Association Tutorial Resource Library Disclaimer The ASA is not licensed to give financial advice. The content of these presentations

More information

THE EQUITY OPTIONS STRATEGY GUIDE

THE EQUITY OPTIONS STRATEGY GUIDE THE EQUITY OPTIONS STRATEGY GUIDE APRIL 2003 Table of Contents Introduction 2 Option Terms and Concepts 4 What is an Option? 4 Long 4 Short 4 Open 4 Close 5 Leverage and Risk 5 In-the-money, At-the-money,

More information

Options Markets: Introduction

Options Markets: Introduction Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract

More information

DERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants

More information

Introduction To Stock Options: The Basics. Mark D. Wolfinger

Introduction To Stock Options: The Basics. Mark D. Wolfinger Introduction To Stock Options: The Basics Mark D. Wolfinger 2008 1 Table of Contents Introduction Chapter 1. What is an Option? Chapter 2. How Does an Option Work? Chapter 3. Stock Options Chapter 4. Getting

More information

FX Options NASDAQ OMX

FX Options NASDAQ OMX FX Options OPTIONS DISCLOSURE For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which

More information

Pro Picks Quick Reference

Pro Picks Quick Reference SUMMARY PAGE Asset Tabs Filter Bar Subscription Status Portfolio Performance Summary Multi-select Filter Drop-down lists Asset Performance Summary Listing Panel Asset Tabs The tabs in the upper left allow

More information

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS

CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS 1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries

More information

LEAPS LONG-TERM EQUITY ANTICIPATION SECURITIES

LEAPS LONG-TERM EQUITY ANTICIPATION SECURITIES LEAPS LONG-TERM EQUITY ANTICIPATION SECURITIES The Options Industry Council (OIC) is a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded

More information

Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors. By Ira G. Kawaller Updated May 2003

Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors. By Ira G. Kawaller Updated May 2003 Basic Strategies for Managing U.S. Dollar/Brazilian Real Exchange Rate Risk for Dollar-Denominated Investors By Ira G. Kawaller Updated May 2003 Brazilian Real futures and options on futures at Chicago

More information

Why asset management arms of banks should continue to lend bank shares

Why asset management arms of banks should continue to lend bank shares Why asset management arms of banks should continue to lend bank shares Robert Peston of the BBA and Jeremy Warner of the Independent have recently asked why the asset management arms of banks continue

More information

Options on. Dow Jones Industrial Average SM. the. DJX and DIA. Act on the Market You Know Best.

Options on. Dow Jones Industrial Average SM. the. DJX and DIA. Act on the Market You Know Best. Options on the Dow Jones Industrial Average SM DJX and DIA Act on the Market You Know Best. A glossary of options definitions appears on page 21. The Chicago Board Options Exchange (CBOE) was founded in

More information

Determination of Forward and Futures Prices

Determination of Forward and Futures Prices Determination of Forward and Futures Prices Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012 Short selling A popular trading (arbitrage) strategy is the shortselling or

More information

Chapter 3: Commodity Forwards and Futures

Chapter 3: Commodity Forwards and Futures Chapter 3: Commodity Forwards and Futures In the previous chapter we study financial forward and futures contracts and we concluded that are all alike. Each commodity forward, however, has some unique

More information

Lecture Two Essentials of Trading. Andy Bower www.alchemetrics.org

Lecture Two Essentials of Trading. Andy Bower www.alchemetrics.org Lecture Two Essentials of Trading Andy Bower www.alchemetrics.org Essentials of Trading Why People Trade Money What People Trade Market Where People Trade Exchanges How People Trade Brokers Orders Margin

More information

Introduction to Options

Introduction to Options Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price

More information

TMX TRADING SIMULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape

TMX TRADING SIMULATOR QUICK GUIDE. Reshaping Canada s Equities Trading Landscape TMX TRADING SIMULATOR QUICK GUIDE Reshaping Canada s Equities Trading Landscape OCTOBER 2014 Markets Hours All market data in the simulator is delayed by 15 minutes (except in special situations as the

More information

General Forex Glossary

General Forex Glossary General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without

More information

Contents. 2 What are Options? 3 Ways to use Options. 7 Getting started. 8 Frequently asked questions. 13 Contact us. 14 Important Information

Contents. 2 What are Options? 3 Ways to use Options. 7 Getting started. 8 Frequently asked questions. 13 Contact us. 14 Important Information Options For individuals, companies, trusts and SMSFs The Options and Lending Facility Contents 2 What are Options? 3 Ways to use Options 7 Getting started 8 Frequently asked questions 13 Contact us 14

More information

Answers to Concepts in Review

Answers to Concepts in Review Answers to Concepts in Review 1. Puts and calls are negotiable options issued in bearer form that allow the holder to sell (put) or buy (call) a stipulated amount of a specific security/financial asset,

More information

Introduction. Part IV: Option Fundamentals. Derivatives & Risk Management. The Nature of Derivatives. Definitions. Options. Main themes Options

Introduction. Part IV: Option Fundamentals. Derivatives & Risk Management. The Nature of Derivatives. Definitions. Options. Main themes Options Derivatives & Risk Management Main themes Options option pricing (microstructure & investments) hedging & real options (corporate) This & next weeks lectures Introduction Part IV: Option Fundamentals»

More information

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs. OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

More information

June 2008 Supplement to Characteristics and Risks of Standardized Options

June 2008 Supplement to Characteristics and Risks of Standardized Options June 2008 Supplement to Characteristics and Risks of Standardized Options This supplement supersedes and replaces the April 2008 Supplement to the booklet entitled Characteristics and Risks of Standardized

More information

Introduction to Futures Contracts

Introduction to Futures Contracts Introduction to Futures Contracts September 2010 PREPARED BY Eric Przybylinski Research Analyst Gregory J. Leonberger, FSA Director of Research Abstract Futures contracts are widely utilized throughout

More information

INVESTMENT DICTIONARY

INVESTMENT DICTIONARY INVESTMENT DICTIONARY Annual Report An annual report is a document that offers information about the company s activities and operations and contains financial details, cash flow statement, profit and

More information

Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO END-OF-CHAPTER QUESTIONS 8-1 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined

More information

In effect CFD s are financial derivatives, originally known as Traded Options, that allow traders to take advantage of prices moving up (long

In effect CFD s are financial derivatives, originally known as Traded Options, that allow traders to take advantage of prices moving up (long What are CFD s In finance, a contract for difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference

More information

THE STOCK MARKET GAME GLOSSARY

THE STOCK MARKET GAME GLOSSARY THE STOCK MARKET GAME GLOSSARY Accounting: A method of recording a company s financial activity and arranging the information in reports that make the information understandable. Accounts payable: The

More information

Chapter 2 Forward and Futures Prices

Chapter 2 Forward and Futures Prices Chapter 2 Forward and Futures Prices At the expiration date, a futures contract that calls for immediate settlement, should have a futures price equal to the spot price. Before settlement, futures and

More information

Concentrated Stock Overlay INCREMENTAL INCOME FROM CONCENTRATED WEALTH

Concentrated Stock Overlay INCREMENTAL INCOME FROM CONCENTRATED WEALTH Concentrated Stock Overlay INCREMENTAL INCOME FROM CONCENTRATED WEALTH INTRODUCING RAMPART CONCENTRATED STOCK OVERLAY STRATEGY When a portfolio includes a concentrated equity position, the risk created

More information

Delivery options. Originally, delivery options refer to the options available to the seller of a bond

Delivery options. Originally, delivery options refer to the options available to the seller of a bond Delivery options Originally, delivery options refer to the options available to the seller of a bond futures contract, including the quality option, the timing option, and the wild card option. Delivery

More information

Class 2: Buying Stock & Intro to Charting. Buying Stock

Class 2: Buying Stock & Intro to Charting. Buying Stock Class 2: Buying Stock & Intro to Charting Today s Class Buying Stock Intro to Charting Real World Analysis Buying Stock What Is a Stock? Share of ownership in a company Publicly traded Holds monetary value

More information

Chapter 3.4. Forex Options

Chapter 3.4. Forex Options Chapter 3.4 Forex Options 0 Contents FOREX OPTIONS Forex options are the next frontier in forex trading. Forex options give you just what their name suggests: options in your forex trading. If you have

More information

An Introduction to Single Stock Futures. Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading

An Introduction to Single Stock Futures. Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading An Introduction to Single Stock Futures Brett Duncan / Richard Hirsch: Corporate and Investment Banking Kurt Pagel: Online Share Trading A new age instrument that provides a link between two kinds of financial

More information

7 Benefits of This Contrarian Strategy By Erik Gebhard, Altavest

7 Benefits of This Contrarian Strategy By Erik Gebhard, Altavest 7 Benefits of This Contrarian Strategy By Erik Gebhard, Altavest Dictionary.com defines the word contrarian as: a person who takes an opposing view, especially one who rejects the majority opinion, as

More information

Short Selling Australian Stocks

Short Selling Australian Stocks Short Selling Australian Stocks What is Short Selling? The best way to explain short selling is to show the difference between going long and going short. Going Long and Making a Profit To go long means

More information

OPTIONS EDUCATION GLOBAL

OPTIONS EDUCATION GLOBAL OPTIONS EDUCATION GLOBAL TABLE OF CONTENTS Introduction What are FX Options? Trading 101 ITM, ATM and OTM Options Trading Strategies Glossary Contact Information 3 5 6 8 9 10 16 HIGH RISK WARNING: Before

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,

More information

Trading Strategies SXM S&P/TSX 60 Index Mini Futures Contract

Trading Strategies SXM S&P/TSX 60 Index Mini Futures Contract Trading Strategies SXM S&P/TSX 60 Index Mini Futures Contract TMX Group Equities Toronto Stock Exchange TSX Venture Exchange Equicom Derivatives Montréal Exchange CDCC Montréal Climate Exchange Fixed Income

More information

How to Read Your Daily Futures Account Statement

How to Read Your Daily Futures Account Statement How to Read Your Daily Futures Account Statement Format: Your statement has eight potential sections listed below. Which sections appear on your statement depends on the positions and type of activity

More information

MODEL TEST PAPER DERIVATIVES MARKET DEALERS MODULE. Q.2 All of the following are true regarding futures contracts except [2 Marks]

MODEL TEST PAPER DERIVATIVES MARKET DEALERS MODULE. Q.2 All of the following are true regarding futures contracts except [2 Marks] MODEL TEST PAPER DERIVATIVES MARKET DEALERS MODULE Q.1 Theta is also referred to as the of the portfolio time decay risk delay risk decay time delay Q.2 All of the following are true regarding futures

More information

Derivative strategies using

Derivative strategies using FP CLASSROOM Derivative strategies using options Derivatives are becoming increasingly important in the world of finance. A Financial Planner can use the strategies to increase profitability, hedge portfolio

More information

Introduction to Index Futures and Options

Introduction to Index Futures and Options Introduction to Index Futures and Options Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice

More information

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13 Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.

More information

1 Regional Bank Regional banks specialize in consumer and commercial products within one region of a country, such as a state or within a group of states. A regional bank is smaller than a bank that operates

More information

Understanding Portfolios. Reading the Portfolio

Understanding Portfolios. Reading the Portfolio Understanding Portfolios Reading the Portfolio The Portfolio Menu Navigation Menu provides access to various areas in a team s portfolio. It is available on all the pages of a team s online portfolio.

More information

Understanding Margins

Understanding Margins Understanding Margins Frequently asked questions on margins as applicable for transactions on Cash and Derivatives segments of NSE and BSE Jointly published by National Stock Exchange of India Limited

More information

SHORT INTRODUCTION OF SHORT SELLING

SHORT INTRODUCTION OF SHORT SELLING Financial Assets and Investing SHORT INTRODUCTION OF SHORT SELLING Dagmar Linnertová Faculty of Economics and Administration, Masaryk University, Lipová 41a, 602 00 Brno, e-mail: Dagmar.Linnertova@mail.muni.cz

More information

SOLUTION1. exercise 1

SOLUTION1. exercise 1 exercise 1 Stock BBB has a spot price equal to 80$ and a dividend equal to 10$ will be paid in 5 months. The on year interest rate is equal to 8% (c.c). 1. Calculate the 6 month forward price? 2. Calculate

More information

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS

MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS CLIENT SERVICE AGREEMENT Halifax New Zealand Limited Client Service Agreement Product Disclosure Statement for MARGIN FOREIGN EXCHANGE AND FOREIGN EXCHANGE OPTIONS Halifax New Zealand Limited Financial

More information

Vertical Spreads If past history was all there was to the game, the richest people would be librarians.

Vertical Spreads If past history was all there was to the game, the richest people would be librarians. Chapter 17 Vertical Spreads If past history was all there was to the game, the richest people would be librarians. Selling Vertical Call Spreads (Bear Call Spread): A bear call spread is a combination

More information

Trading CFDs with Trader Dealer ABN 17 090 611 680 (AFSL NO 333297)

Trading CFDs with Trader Dealer ABN 17 090 611 680 (AFSL NO 333297) Trading CFDs with Trader Dealer ABN 17 090 611 680 (AFSL NO 333297) Pages 1. Overview 3 2. What is a CFD? 3 3. Why Trade CFDs? 3 4. How Do CFDs Work? 4 4.1 Margin 4 4.2 Commission 5 4.3 Financing 6 4.4

More information

CHAPTER 20. Financial Options. Chapter Synopsis

CHAPTER 20. Financial Options. Chapter Synopsis CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified

More information

2011 JITENDRARKV STOCK ADVISERY ONLINE CENTURE

2011 JITENDRARKV STOCK ADVISERY ONLINE CENTURE 2011 JITENDRARKV STOCK ADVISERY ONLINE CENTURE BY- Er. JITENDRA KUMAR VERMA E-mail-id- jitendra.smt@gmail.com Log on to- www.jitendrarkv.webs.com Take profits and do multiple trades The successful strategy

More information

ISE Vertical Spread Indexes

ISE Vertical Spread Indexes ISE Vertical Spread Indexes ISE SPY Bear Call Option Overlay Index (VCS) ISE SPY Bull Put Option Overlay Index (VPS) International Securities Exchange, ISE, and the ISE globe logo design are trademarks

More information

Today the ROAR of the S&P pit is gone but long after electronic trading took over the rules continue to be a vital part of our trading tool box

Today the ROAR of the S&P pit is gone but long after electronic trading took over the rules continue to be a vital part of our trading tool box MRTOPSTEP E-BOOK; RULES OF THE ROAD Getting Started Trading Rules 101 Trading Rules 101 is a combination of patterns and observations from the trading floors of the Chicago Board of Trade and the Chicago

More information

Fundamentals Level Skills Module, Paper F9. Section B

Fundamentals Level Skills Module, Paper F9. Section B Answers Fundamentals Level Skills Module, Paper F9 Financial Management September/December 2015 Answers Section B 1 (a) Market value of equity = 15,000,000 x 3 75 = $56,250,000 Market value of each irredeemable

More information

Binary options. Giampaolo Gabbi

Binary options. Giampaolo Gabbi Binary options Giampaolo Gabbi Definition In finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options

More information

Advanced Strategies for Managing Volatility

Advanced Strategies for Managing Volatility Advanced Strategies for Managing Volatility Description: Investment portfolios are generally exposed to volatility through company-specific risk and through market risk. Long-term investors can reduce

More information

Interest Rate Options

Interest Rate Options Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest

More information

Understanding Options Trading. ASX. The Australian Sharemarket

Understanding Options Trading. ASX. The Australian Sharemarket Understanding Options Trading ASX. The Australian Sharemarket Disclaimer of Liability Information provided is for educational purposes and does not constitute financial product advice. You should obtain

More information

Derivatives - Options Theory September 2008

Derivatives - Options Theory September 2008 - Options Theory September 2008 Milestone International Tax Consultants Ltd 45 Clarges Street London W1J 7EP Tel: +44 (0)20 7016 5480 Fax: +44 (0)20 7016 5481 Web: www.milestonetax.com Definitions Option

More information