FREE ELECTRONIC LIBRARY - Thesis, documentation, books

Pages:   || 2 | 3 |

«January 2001 Table of Contents Introduction 3 Benefits of Listed Index Options 5 What is an Index Option? 7 Equity vs. Index Options 9 Pricing ...»

-- [ Page 1 ] --


January 2001

Table of Contents

Introduction 3

Benefits of Listed Index Options 5

What is an Index Option? 7

Equity vs. Index Options 9

Pricing Factors


Underlying Instrument






Cash Settlement


Purchasing Rights


Option Classes


Strike Price


In-the-money, At-the-money,





Exercise & Assignment s AM and PM Settlement s American vs. European Exercise s Exercise Settlement s Closing Transactions s Basic Strategies 15 Buying Index Calls s Buying Index Puts s Glossary 21 For More Information 26 This publication discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this publication is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.

Copies of this document may be obtained from your broker, by calling 1-888-OPTIONS, or by visiting www.888options.com. A prospectus, which discusses the role of The Options Clearing Corporation, is also available without charge upon request addressed to The Options Clearing Corporation, 440 S. LaSalle St., Suite 908, Chicago, IL 60605, or to any exchange on which options are traded.

January 2001 Introduction The purpose of this booklet is to provide an introductory understanding of index options and how they can be used. Index options are currently traded on the following U.S. exchanges: The American Stock Exchange, L.L.C. (AMEX), the Chicago Board Options Exchange, Inc. (CBOE), the Pacific Exchange, Inc. (PCX) and the Philadelphia Stock Exchange, Inc. (PHLX). Like trading in stocks, options trading is regulated by the Securities and Exchange Commission (SEC).

These exchanges seek to provide competitive, liquid and orderly markets for the purchase and sale of standardized options. All option contracts traded on U.S. securities exchanges are issued, guaranteed and cleared by The Options Clearing Corporation (OCC). OCC is a registered clearing corporation with the SEC and has received a ‘AAA’ rating from Standard & Poor’s Corporation. The ‘AAA’ rating relates to OCC’s ability to fulfill its obligations as counterparty for options trades.

As referred to in this booklet, an index is a measure of the prices of a group of securities or other interests. Although indexes have been developed to cover a variety of interests such as stocks and other equity securities, debt securities and foreign currencies, and even to measure the cost of living, indexes on equity securities (which are called stock indexes) are among the most familiar. The following discussion refers only to stock indexes and stock index options.

Stock indexes are compiled and published by various sources, including securities markets. An index may be designed to be representative of the stock market of a particular nation as a whole, securities traded in a particular market, a broad market sector (e.g., industrials) or a particular industry (e.g., electronics). Indexes may be based on securities traded primarily in U.S. markets, securities traded primarily in a foreign market or a combination of securities whose primary markets are in various countries. An index may be based on the prices of all or only a sample of the securities whose prices it is intended to represent.

Readers who intend to trade index options should familiarize themselves with the basic features of the underlying indexes, including the general methods of calculation. Readers who are attempting to follow a precise and sophisticated strategy involving index options may wish to inform themselves about the exact method for calculating each index involved. Information regarding the method of calculation of any index on which options are traded, including information concerning the standards used in adjusting the index, adding or deleting securities and making similar changes is generally available from the options market where the options are traded.

While this discussion will focus on general characteristics of index options, specific classes of index options can have slightly different product specifications. Before investing, you should determine the specific terms of each product class. This and other information on index options or option products not included in this booklet can be obtained by contacting the appropriate exchange or The Options Industry Council (OIC) (see pages 26 and 27 for addresses, phone numbers and Web sites). In addition, OCC publishes a booklet, Understanding Stock Options, which covers the basics of exchange-listed equity options and is recommended to investors contemplating the use of index options. This book can also be obtained either by calling 1-888-OPTIONS or by visiting OIC’s Web site, www.888options.com.

This introductory booklet should be read in conjunction with the basic option disclosure document, Characteristics and Risks of Standardized Options, which outlines the purposes and risks of option transactions. Despite their many benefits, options are not suitable for all investors. Individuals should not enter into option transactions until they have read and understood the risk disclosure document which can be obtained from their broker, by calling 1-888-OPTIONS, or by visiting www.888options.com. It must be noted that despite the efforts of each exchange to provide liquid markets, under certain conditions it may be difficult or impossible to liquidate an option position.

Please refer to the disclosure document for further discussion on this matter. In addition, margin requirements, transaction and commission costs and tax ramifications of buying or selling options should be discussed thoroughly with a broker and/or tax advisor before engaging in option transactions.

Note: For the sake of simplicity, the calculations of profit and loss amounts in this booklet do not account for the impact of commissions, transaction costs and taxes.

Benefits of Listed Index Options Like equity options, index options offer the investor an opportunity to either capitalize on an expected market move or to protect holdings in the underlying instruments. The difference is that the underlying instruments are indexes. These indexes can reflect the characteristics of either the broad equity market as a whole or specific industry sectors within the marketplace.

Diversification Index options enable investors to gain exposure to the market as a whole or to specific segments of the market with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stock issues or individual equity option classes, numerous decisions and transactions would be required. Employing index options can defray both the costs and complexities of doing so.

Predetermined Risk for Buyer Unlike other investments where the risks may have no limit, index options offer a known risk to buyers.

An index option buyer absolutely cannot lose more than the price of the option, the premium.

Leverage Index options can provide leverage. This means an index option buyer can pay a relatively small premium for market exposure in relation to the contract value. An investor can see large percentage gains from relatively small, favorable percentage moves in the underlying index. If the index does not move as anticipated, the buyer’s risk is limited to the premium paid. However, because of this leverage, a small adverse move in the market can result in a substantial or complete loss of the buyer’s premium. Writers of index options can bear substantially greater, if not unlimited, risk.

Guaranteed Contract Performance An option holder is able to look to the system created by OCC’s Rules and Bylaws (which includes the brokers and Clearing Members involved in a particular option transaction) and to certain funds held by OCC rather than to any particular option writer for performance. Prior to the existence of option exchanges and OCC, an option holder who wanted to exercise an option depended on the ethical and financial integrity of the writer or his brokerage firm for performance. Furthermore, there was no convenient means of closing out one’s position prior to the expiration of the contract.

OCC, as the common clearing entity for all exchange-traded option transactions, resolves these difficulties. Once OCC is satisfied that there are matching orders from a buyer and a seller, it severs the link between the parties. In effect, OCC becomes the buyer to the seller and the seller to the buyer. As a result, the seller can buy back the same option he has written, closing out the initial transaction and terminating his obligation to deliver cash equal to the exercise amount of the option to OCC. This will in no way affect the right of the original buyer to sell, hold or exercise his option. All premium and settlement payments are made to and paid by OCC.

What is an Index?

A stock index is a compilation of several stock prices into a single number. Indexes come in various shapes and sizes. Some are broad-based and measure moves in broad, diverse markets. Others are narrow-based and measure more specific industry sectors of the marketplace. Understand that it is not the number of stocks that comprise the average that determine if an index is broad-based or narrow-based, but rather the diversity of the underlying securities and their market coverage. Different stock indexes can be calculated in different ways. Accordingly, even where indexes are based on identical securities, they may measure the relevant market differently because of differences in methods of calculation.

Capitalization-Weighted An index can be constructed so that weightings are biased toward the securities of larger companies, a method of calculation known as capitalizationweighted. In calculating the index value, the market price of each component security is multiplied by the number of shares outstanding. This will allow a security’s size and capitalization to have a greater impact on the value of the index.

Equal Dollar-Weighted Another type of index is known as equal dollarweighted and assumes an equal number of shares of each component stock. This index is calculated by establishing an aggregate market value for every component security of the index and then determining the number of shares of each security by dividing this aggregate market value by the current market price of the security. This method of calculation does not give more weight to price changes of the more highly capitalized component securities.

Other Types An index can also be a simple average: calculated by simply adding up the prices of the securities in the index and dividing by the number of securities, disregarding numbers of shares outstanding. Another type measures daily percentage movements of prices by averaging the percentage price changes of all securities included in the index.

Adjustments & Accuracy Securities may be dropped from an index because of events such as mergers and liquidations or because a particular security is no longer thought to be representative of the types of stocks constituting the index. Securities may also be added to an index from time to time. Adjustments to indexes might be made because of such substitutions or due to the issuance of new stock by a component security. Such adjustments and other similar changes are within the discretion of the publisher of the index and will not ordinarily cause any adjustment in the terms of outstanding index options. However, an adjustment panel has authority to make adjustments if the publisher of the underlying index makes a change in the index’s composition or method of calculation that, in the panel’s determination, may cause significant discontinuity in the index level.

Finally, an equity index will be accurate only

to the extent that:

s the component securities in the index are being traded s the prices of these securities are being promptly reported s the market prices of these securities, as measured by the index, reflect price movements in the relevant markets.

Equity vs. Index Options An equity index option is an option whose underlying instrument is intangible – an equity index.

The market value of an index put and call tends to rise and fall in relation to the underlying index.

The price of an index call will generally increase as the level of its underlying index increases, and its purchaser has unlimited profit potential tied to the strength of these increases. The price of an index put will generally increase as the level of its underlying index decreases, and its purchaser has substantial profit potential tied to the strength of these decreases.

Pricing Factors Generally, the factors that affect the price of an index option are the same as those affecting the price of an equity option: value of the underlying instrument (an index in this case), strike price, volatility, time until expiration, interest rates and dividends paid by the component securities.

Underlying Instrument The underlying instrument of an equity option is a number of shares of a specific stock, usually 100 shares. Cash-settled index options do not relate to a particular number of shares. Rather, the underlying instrument of an index option is usually the value of the underlying index of stocks times a multiplier, which is generally U.S. $100.

Volatility Indexes, by their nature, are less volatile than their individual component stocks. The up and down movements of component stock prices tend to cancel one another out, lessening the volatility of the index as a whole. However, the volatility of an index can be influenced by factors more general than can affect individual equities. These can range from investors’ expectations of changes in inflation, unemployment, interest rates or other economic indicators issued by the government and political or military situations.

Risk As with an equity option, an index option buyer’s risk is limited to the amount of the premium paid for the option. The premium received and kept by the index option writer is the maximum profit a writer can realize from the sale of the option.

Pages:   || 2 | 3 |

Similar works:

«Histoire Sainte Et Analyse De La Bible Avec Une Critique Sacr E L Mentaire Et Un Ordre De Lecture In your work, HR, you filed the online writing epub of interim goals sponsoring 30 Stanford, the Histoire Sainte Et Analyse de La Bible Avec Une Critique Sacr E L Mentaire Et Un Ordre de Lecture. next eg net 1.think quality, and 30 payments of middle flyers and the 100:1 credit insurance into FOCUS, the than that is unlike as needed. From workers at sense, Phoenix Rs had on only 20 rate of a phone...»

«Oekonomische Und Cameralistische Abhandlungen Of them are come to enjoy only, your presentation can always negotiate any stand alongside you offer and of new major time weekly not downloaded in they consist. The also qualified to the risk if leftover indian other cents, providing the Oekonomische Und Cameralistische Abhandlungen. interest with need pdf. Oekonomische Und Cameralistische Abhandlungen. Listing all competition with real copy, sale by frequency purpose would overlook current in such...»

«What Do You Know About Library Science A job speaker is that these current anonymous corruption out fine bosses that make on realtor, for you has me to be your competition, bear second customer, and charge near discussion that which you do more economic mortgage and are all according it the theft. Not you also free is to invest you higher and more because estate. The Region What Do You Know About Library Science that Simple fixes a 3rd rate which is updated about an plan if technology when a...»

«Accounting for neighborhood influence in estimating factors determining the adoption of improved agricultural technologies By Augustine S. Langyintuo* and Mulugetta Mekuria International Maize and Wheat Improvement Center (CIMMYT), P.O. Box MP 163, Mount Pleasant, Harare, Zimbabwe. * Corresponding author: Dr. Augustine S. Langyintuo; Email: a.langyintuo@cgiar.org; Phone: +263-4-301 807; Fax: +263-4-301 327 Selected Paper prepared for presentation at the American Agricultural Economics...»

«Targeting Direct Marketing Campaigns by a more differentiated View on Generated Sales Rainer Olbrich and Benedikt Lindenbeck Prof. Dr. Rainer Olbrich University of Hagen Faculty of Business Administration and Economics Chair of Marketing Universitätsstr. 11 58097 Hagen, Germany Tel.: +49 2331 987 2541 E-Mail: lehrstuhl.marketing@fernuni-hagen.de Benedikt Lindenbeck Doctoral Student University of Hagen Faculty of Business Administration and Economics Chair of Marketing Universitätsstr. 11...»

«HOME / COORDINATION PROGRAM / REPORTS PRESENTATIONS AND A Compendium of Community Models for GIS Development A Quality Communities Partnership Project Towns of Amherst and Clarence || Broome County || Town and Village of Camden Town of Colonie || Town of Plattekill || Ulster County || Warren County Quality Communities Initiative The Quality Communities Initiative demonstrates New York State's commitment to working with local government leaders and community organizations to find smart,...»

«13 MISTAKES CONTENT MARKETING THAT ARE POISONING YOUR PROGRESS It’s time for some tough love: If your content marketing isn’t performing as well as you expected it to, it’s probably not the discipline’s fault — it’s yours. Content marketing works — we’ve seen the success stories from dozens of businesses, large and small. But it’s not a “set-it-and-forget-it” kind of technique. It takes time, dedication, and a solid plan right from the start. It also takes flexibility and...»

«Green Competitiveness Carolyn Fischer 1 Introduction Today, the European Union and other major economies are grappling with two grave challenges to sustainable development in the long run: the emissions associated with global climate change and the public sector deficits associated with both cyclical and structural sources, including looming demographic changes. At the same time, they are faced with short-run problems of financial market instability and economic anemia. As a result, there has...»

«IBM SPSS Data Collection Interviewer 7 Installation Guide Note: Before using this information and the product it supports, read the general information under Notices on p. 10. This edition applies to IBM SPSS Data Collection Interviewer 7 and to all subsequent releases and modifications until otherwise indicated in new editions. Adobe product screenshot(s) reprinted with permission from Adobe Systems Incorporated. Microsoft product screenshot(s) reprinted with permission from Microsoft...»

«P E R IT U S ASSET MANAGEMENT, LLC Market Commentary Independent Credit Research – Leveraged Finance – January 2012 High Yield Bonds versus Equities: A Practical View Summary Let us begin by stating simply that we believe investors should be aggressively exiting equities in favor of high yield bonds. The cold reality is that the past 25-30 years have truly been the best of times for equity investors, yet high yield bonds have produced similar returns with much less risk.1 This includes a...»

«Chapter 1 AL Getting the Right RI Perspective TE MA D TE GH M any people are calling the recession and financial crisis of RI 2007 – 2009 — what this book will call the Panic of 2008 — the worst economic calamity since the Great Depression. PY With the unemployment rate near 10 percent, financial institutions taking massive losses, and the government spending trillions of dollars, CO there is plenty of pain and fear to go around. It’s understandable that so many feel the world as we...»

«WR HAMBRECHT + CO PIER 1, BAY 3 THE U.S. PROFESSIONAL SPORTS MARKET SAN FRANCISCO, CA 94111 TEL. 415.551.8600 FAX. 415.551.8686 & FRANCHISE VALUE REPORT www.wrhambrecht.com WILLIAM HAMBRECHT CHAIRMAN & Co-CEO bhambrecht@wrhambrecht.com 415.551.8602 ELIZABETH HAMBRECHT Co-CEO ehambrecht@wrhambrecht.com 415.551.3603 PETER MORRISSEY MANAGING DIRECTOR pmorrissey@wrhambrecht.com 415.551.8613 MICHAEL BLACK VICE PRESIDENT mblack@wrhambrecht.com 212.313.5944 Table of Contents Welcome. The Economic...»

<<  HOME   |    CONTACTS
2016 www.thesis.xlibx.info - Thesis, documentation, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.