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Options trade examples of course review

(Last Updated On: July 21, 2015)

Options trade examples of course reviewexamples

This is the final posting on this FREE futures and options course

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Option trade examples of coarse review  There is an empirical example with image entitled which put the buyIn attached Downloads We are trying to establish a floor price or minimum selling price.we know the floor price is equal to put strike minus as premium minus the basisEg. Soybeans long cash $5.80 May futures at $6.20Considering:Strike price $5.75 premium at seven centsStrike price is six dollars premium $.14Strike price is $6.25 premium at $.25Which put to buy? Factors include direction of expected price change and desired level of protectionYou need to ask yourself what floor price do you want which is the strike price minus the premium. The basis is going to be constant. Strike at $6.25 -$.25 including unexpected basis you could be $.30 so new floor price is $5.70. With the cheapest strike price of $5.75 -7 cents -$.30 expected basis which has a floor. Question is which put the buy? When hedging with options as part of the decision-making. Each put will have different factors.If you are an airline they will buy options, which option to buys decided on on pricing changes of future oil prices. This will have a strong feeling as one of the factors so they may buy the most expensive option. It depends on your risk aversion and your pricing expectation of the instrument. Referred to both calculation examples Choose $6.25 put optionSo minimum price equals 6.25 -$.25 -$.30 of expected basis equaling $5.70. Price declines $.50 the net return equals $5.70 -$.30 -$.25 plus $.55 equals $5.70 were intrinsic value equals $.55. You still factory and $.30 expected basis  include premium. Since strike is at $6.25 -$5.70 your intrinsic values $.55. Take the futures minus the basis minus the premium plus intrinsic value gives you $5.70. Price floor was $5.70If the price then increases by $.50 the net return equals $6.70 -$.30 -$.25 equals $6.15. $6.20 plus $.50 increase. The strike is still $6.25 but the future is $6.70 so it expires worthless. If you buy the put option but the prices risen there is no intrinsic value. With $6.15 you see the reasons why hedgers are attracted to options. If you use a futures contract and the bases did not change, you would’ve ended up with a price objective. Here use an option what the basis did not change, we got more than the price floor since the price increased more than what the premium cost. You also bought protection if prices fall. Go the cheaper option of 5.75, So midprice is equal to $5.75 -7 cents -$.30 of expect the bases equals $5.38. Seven cents  is the premium. It is lower than the more expensive option $5.70.If price falls by $.50 the net return equals $5.70 -$.30 -7 cents +5 cents equaling $5.38 intrinsic value is five cents. The features price goes from $6.20 to $5.70. Since the strike was at $5.75 the time value zero. Because you have a put option you have the right to sell. This becomes your price floor $5.38. You’ll get a lower return if you bought the more expensive option. Prices fall by $.50 you want to have the expensive option because it gives you a floor of 5.70 versus 5.38. If prices rise the net return equals $6.70 -$.30 -7 cents equals $6.33. This is out of the money. Make more and $6.33 versus $6.15First example gives more protection if price is decline But second option is better prices go up You cannot rent the strategy in absence of information on the hedgers For risk aversion or absence of information on what expectations are. If you chart the example in the attached imageAssume that has your is long cash Soubean being at $5.80She buys it may put with $5.75 strike for seven cents per bushelAssume basis is zero If the payout chart with a 45° line.  Love the expected return greater or less than $5.80 on the vertical axis. If you add the long put option with the straight of $5.75 with a premium of seven Cents. The breakeven is $5.68 which is our payoff to the put. When you combine both you get a synthetic call option which is the dash line. When you add the put to the cash, you look for the kinked points on the long point just set the strike price of $5.75. You know the premium is seven cents not $5.75, you were down a nickel to the 45° line so you add 5+7equals $.12. This becomes a price floor relative to the $5.80. This is a strike minus the premium. $5.75 which is strike witches $5.80 -$.12 equals $5.68. This $5.68 is the breakeven point so this is a synthetic call. The 12 sons comes from those expected price that you shall receive above or below $5.80 which is the current price. The cash line crosses at $5.80. Expected price above or below that well you try to establish your floor price with the option. The question is where is that floor price which is the strike minus the premium but after netting out the basis. The strike is $5.75 while the premium is seven cents which gives $5.68. This is one way to get the $.12.Remember it is $5.80 -$.12 equals $5.68.  Another way to get $.12 to add the payoff lines that where it is kinked which is  at seven cents since this is your premium. If you go down the 45° wanted to five cents. For random lot two groups of market participants of hedgers versus speculators. Hedgers are buying insurance from the speculators. They pay very little for the insurance so they’re breaking even. Within speculators as professionals who make money. There’s another group but bigger set of speculators that have little knowledge. As this is a Zero sum game, hedges are breaking even professional speculators are making money, set of little knowledge speculators will lose. Little knowledge means it’s dangerous but there are those who have no knowledge you could break even.

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