Options On Futures
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Modifié le 23/9/2007 12:14
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File spécialisée dans le trading d'options de contrats FUTURES
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Modifié le 23/9/2007 12:14
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; http://www.investopedia.com/articles/optioninvestor/02/061302.asp
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Becoming Fluent in Options on Futures
If you've ever studied a second language, you know how hard it can be. But once you learn, say, Spanish as a second language - learning Italian as a third would be much easier since both have common Latin roots. To get facility with Italian as a third language, you would need only to grasp minor changes in word forms and syntax. Well, the same could be said for learning options.
For most people, learning about stock options is like learning to speak a new language, which requires wrestling with totally unfamiliar terms. But if you already have some experience with stock options, understanding the language of options on futures becomes easy. In fact, basic concepts such as delta, time value and strike price apply the same way to futures options as to stock options, except for slight variations in product specifications, essentially the only hurdle to surmount.
In this article, we provide an introduction to the world of S&P 500 futures options that will reveal to you how easy it is to make the transition from to options on futures (also known as commodity or futures options), where a world of potential profit awaits.
Stock Index Options on Futures
The first thing that probably throws a curve ball at you when initially approaching options on futures is that you may not be familiar with a futures contract, the underlying instrument upon which options on futures trade. Recall that for stock options, the underlying is the equity issue (e.g. IBM call options trade on IBM stock). Since most investors understand how to interpret stock prices, figuring out the underlying is easy.
When learning futures options, on the other hand, traders new to any particular market (bonds, gold, soybeans, coffee or the S&Ps) need to get familiar not only with the option specifications but also with the product specifications of the underlying futures contract. These, however, are insignificant obstacles in today's online environment, which offers so much information just a click away. This article will hopefully interest you in exploring these exciting markets and new trading opportunities.
To illustrate how options on futures work, I will explain the basic characteristics of S&P 500 options on futures, which are the more popular in the world of futures options. Although these are cash-based futures options (i.e. they automatically settle in cash at expiration), the logic of S&P futures options, like all futures options, is the same as that of stock options. S&P 500 futures options, however, offer unique advantages; for example, they can allow you to trade with superior margin rules (known as SPAN margin), which allow more efficient use of your trading capital.
Perhaps the easiest way to begin getting a feel for options on futures is simply to look at a quotes table of the prices of S&P 500 futures and the prices of the corresponding options on futures. Essentially, the principle of the pricing of S&P futures is the same as that of the price behavior of any stock. You want to buy low and sell high. In other words, if the S&P futures rise, the value of the contract rises and vice versa if the price of S&P futures fall.
There is, however, a key difference between futures and stock options. A one-dollar change in a stock option is equivalent to $1 (per share), which is uniform for all stocks. With S&P futures, a one-dollar change in price is worth $250 (per contract), and this is not uniform for all futures and futures options markets. While there are other issues to get familiar with - such as the fair value of S&P futures and the premium on the futures contract - these related concepts are insignificant in practice and for what you need to understand for most option strategies.
Aside from the distinction of price specification, there are some other important characteristics of S&P options that are important. Since these options trade on the underlying futures, the level of S&P futures, not the S&P 500 stock index, is the key factor affecting prices of options on S&P futures. Volatility and time-value decay of course also play their part, just like they affect a stock option.
Let's take a closer look at S&P futures and option prices, particularly at how changes in the price of futures affect changes in the prices of the option. First let's look at S&P futures product specifications, which are presented in fgure 1.
S&P futures trade in "dime-sized" ticks (the minimum price change intervals), worth $25 each, so a full point (one dollar) is equal to $250. The active month is known as the "front-month contract", and it is the first of the three delivery months listed in figure 2. The last trading day for all S&P futures contracts is on the Thursday before expiration, which is on the third Friday of the contract month. By looking at figure 2 below, we can see some actual prices for the S&P 500 futures, taken from the close of daily trading (pit-session) on Jun 12, 2002.
Figure 2 - Settlement prices for June 12, 2002
The Jun S&P futures contract in figure 2, for example, settled at 1020.20 on this particular day. The point change of +6.00 is equivalent to a gain of $1,500 per single contract (6 x $250 = $1,500). It is worth noting that the S&P futures and the S&P 500 stock index will trade nearly identically, but the S&P futures will trade with a slight premium attached.
Understanding S&P Futures Options
Now let's turn to some of the corresponding options. Like for nearly all options on futures, there is a uniformity of pricing between the futures and options. That is, the value of a one-dollar change in premium is the same as a one-dollar change in the futures price. This makes things easy. In the case of S&P 500 futures options and their underlying futures, a one-dollar change is worth $250. To provide some real examples of this principle, I have selected in figure 3 the 25-point interval strike prices of some out-of-the-money puts and calls trading on the Jun S&P futures.
Just as we would expect for stock put and call options, the delta in our examples below is positive for calls and negative for puts. Therefore, since the Jun S&P futures rose by six points (at $250 per point, or dollar), the puts fell in value and the calls rose in value. The strikes farthest from the money (925 put and 1100 call) will have the lower delta values, and those nearest the money (1000 put and 1025 call) have higher delta values. Both the sign and the size of the change in dollar value for each option make this clear. The higher the delta value the greater the option price change will be affected by a change of the underlying S&P futures.
Figure 3 - S&P option prices at settlement on June 12, 2002
For example, we know that the Jun S&P futures rose six points to settle at 1020.20. This settlement price is just shy of the Jun call strike price of 1025, which increased in value by $425. This near-the-money option has a higher delta (delta = 0.40) than options farther from the money, such as the call option with a strike price of 1100 (delta = 0.02), which increased in value by only $12.50. Delta values measure the impact further changes in the underlying S&P futures will have on these option prices. If, for instance, the underlying Jun S&P futures were to rise 10 more points (provided there is no change in time-value decay and volatility), the S&P call option in figure 3 with a strike price of 1025 would rise by four points, or gain $1,000.
The same but reverse logic applies to the S&P put options in figure 3. Here we see the put option prices declining with a rise in the Jun S&P futures. The nearest-the-money option has a strike price of 1000, and its price fell by $600. Meanwhile, the farther-from-the-money put options, such as the option with a strike price of 925 and delta of -0.04, lost less, a value of $225.
Conclusion
While there are many ways to trade using these options, many traders prefer to be a net seller of options (which is featured in How to Profit from Time-Value Decay). Whether you prefer to buy or write (sell) stock options using either simple spreads or more complex strategies, you can, with the basics presented here, easily adapt many of your favorite strategies to S&P options on futures.
As for other options on futures markets, you'll need to get familiar with their product specifications - such as trading units and tick sizes - before doing any trading. Having said that, however, I am sure you will find that becoming fluent in a second options language is not as difficult as you might initially have thought.
By John Summa, CTA, OptionsNerd.com
John Summa is founder and president of OptionsNerd.com and a registered commodity trading advisor (CTA) with the National Futures Association. He has coauthored Options on Futures: New Trading Strategies and Options on Futures Workbook (John Wiley & Sons, 2001) and more recently wrote Trading Against The Crowd: Profiting From Fear and Greed in Stock, Futures and Options Markets (John Wiley & Sons, 2004). Founded in 1998, OptionsNerd.com is devoted to providing educational support to options traders, option trading advisories and managed futures account services. A former professional skier and a PhD-trained economist, Mr. Summa operates his own delta-neutral options trading CTA program. If you wish to get trained by John Summa, he offers small-group seminars in the USA, Asia-Singapore, Canada, and Australia. Visit OptionsNerd.com for more info.
There is risk of loss trading futures and options. Past performance does not guarantee future results. Trade with risk capital only.
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Modifié le 29/9/2007 14:13
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Ressources: http://www.futuresknowledge.com/pdf/MGEX_examining_futuresandoptions.pdf
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Modifié le 29/9/2007 14:26
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a: http://www.google.be/search?hl=fr&q=list+futures+options+brokers&btnG=Recherche+Google&meta=
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b: http://www.futures-brokers-directory.com/commodity-options-futures-brokers-a.htm
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Source: http://www.futuresknowledge.com/research_a_broker/index.asp
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This section is designed to help the beginning to advanced trader find a broker that is right for them by providing detailed information on different brokers with different specialities. The brokers that appear first, and have the most detailed information are paid sponsors... Meaning they have taken the extra effort to ensure that you, as a trader, have all of the information you need to make an educated decision.
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Modifié le 29/9/2007 20:28
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- http://www.CommodityTradingSchool.com
The Commodity markets are booming! Learn how to trade them though our FREE webinars!
This is an open invitation to visit www.commoditytradingschool.com a FREE educational online trading school that offers daily trading classes in an effort to help you become a better and more knowledgeable trader in the futures and option market. There are also many informational articles on the website that you can print out and read at your leisure.
We teach various trading techniques that we have learned in our twenty plus years of commodity trading using both futures and options.
Make 2007 the year you become a better trader!
The best part is…it’s for free!!!!
Paul Brittain
thedean@commoditytradingschool.com
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Modifié le 09/10/2007 22:52
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Exemple de "Risk Disclosure" ds le cas du trading d'options...
============================================
Alaron Trading Corporation
OPTIONS DISCLOSURE STATEMENT
BECAUSE OF THE VOLATILE NATURE OF THE COMMODITIES
MARKETS, THE PURCHASE AND GRANTING OF COMMODITY
OPTIONS INVOLVE A HIGH DEGREE OF RISK. COMMODITY
OPTION TRANSACTIONS ARE NOT SUITABLE FOR MANY
MEMBERS OF THE PUBLIC. SUCH TRANSACTIONS SHOULD
BE ENTERED INTO ONLY BY PERSONS WHO HAVE READ
AND UNDERSTOOD THIS DISCLOSURE STATEMENT AND
WHO UNDERSTAND THE NATURE AND EXTENT OF THEIR
RIGHTS AND OBLIGATIONS AND OF THE RISKS INVOLVED IN
THE OPTION TRANSACTIONS COVERED BY THIS DISCLOSURE
STATEMENT. BOTH THE PURCHASER AND THE
GRANTOR SHOULD KNOW WHETHER THE PARTICULAR
OPTION IN WHICH THEY CONTEMPLATE TRADING IS AN
OPTION WHICH, IF EXERCISED, RESULTS IN THE ESTABLISHMENT
OF A FUTURES CONTRACT (AN "OPTION ON A
FUTURES CONTRACT") OR RESULTS IN THE MAKING OR
TAKING OF DELIVERY OF THE ACTUAL COMMODITY UNDERLYING
THE OPTION (AN "OPTION ON A PHYSICAL COMMODITY").
BOTH THE PURCHASER AND THE GRANTOR OF AN
OPTION ON A PHYSICAL COMMODITY SHOULD BE AWARE
THAT, IN CERTAIN CASES, THE DELIVERY OF THE ACTUAL
COMMODITY UNDERLYING THE OPTION MAY NOT BE
REQUIRED AND THAT, IF THE OPTION IS EXERCISED, THE
OBLIGATIONS OF THE PURCHASER AND GRANTOR WILL BE
SETTLE IN CASH. A PERSON SHOULD NOT PURCHASE ANY
COMMODITY OPTION UNLESS HE IS ABLE TO SUSTAIN A
TOTAL LOSS OF THE PREMIUM AND TRANSACTION COSTS
OF PURCHASING THAT OPTION. A PERSON SHOULD NOT
GRANT ANY COMMODITY OPTION UNLESS HE IS ABLE TO
MEET ADDITIONAL CALLS FOR MARGIN WHEN THE MARKET
MOVES AGAINST HIS POSITION AND, IN SUCH CIRCUMSTANCES,
TO SUSTAIN A VERY LARGE FINANCIAL LOSS. A
PERSON WHO PURCHASES AN OPTION SHOULD BE AWARE
THAT IN ORDER TO REALIZE ANY VALUE FROM THE OPTION,
IT WILL BE NECESSARY EITHER TO OFFSET THE OPTION
POSITION OR TO EXERCISE THE OPTION. IF AN OPTION
PURCHASER DOES NOT UNDERSTAND HOW TO OFFSET OR
EXERCISE AN OPTION, THE PURCHASER SHOULD
REQUEST AN EXPLANATION FROM THE FUTURES COMMISSION
MERCHANT OR THE INTRODUCING BROKER. CUSTOMERS
SHOULD BE AWARE THAT IN A NUMBER OF CIRCUMSTANCES,
SOME OF WHICH WILL BE DESCRIBED IN
THIS DISCLOSURE STATEMENT, IT MAY BE DIFFICULT OR
IMPOSSIBLE TO OFFSET AN EXISTING OPTION POSITION ON
AN EXCHANGE. THE GRANTOR OF AN OPTION SHOULD BE
AWARE THAT, IN MOST CASES, A COMMODITY OPTION MAY
BE EXERCISED AT ANY TIME FROM THE TIME IT IS GRANTED
UNTIL IT EXPIRES. THE PURCHASER OF AN OPTION
SHOULD BE AWARE THAT SOME OPTION CONTRACTS MAY
PROVIDE ONLY A LIMITED PERIOD OF TIME FOR EXERCISE
OF THE OPTION.
THE PURCHASER OF A PUT OR A CALL IS SUBJECT TO THE
RISK OF LOSING THE ENTIRE PURCHASE PRICE OF THE
OPTION - THAT IS THE PREMIUM PAID FOR THE OPTION
PLUS ALL TRANSACTION COSTS.
THE COMMODITY FUTURES TRADING COMMISSION
REQUIRES THAT ALL CUSTOMERS RECEIVE AND ACKNOWLEDGE
RECEIPT OF A COPY OF THIS DISCLOSURE STATEMENT
BUT DOES NOT INTEND THIS STATEMENT AS A RECOMMENDATION
OR ENDORSEMENT OF EXCHANGE-TRADED
COMMODITY OPTIONS.
(1) Some of the risks of Option Trading.
Special market movement of the underlying future or underlying
physical commodity cannot be predicted accurately.
The grantor of a call option who does not have a long position in the
underlying futures contract or underlying physical commodity is subject
to risk of loss should the price of the underlying futures contract
or underlying physical commodity increase by an amount greater
than the premium received for granting the call option.
The grantor of a call option who has a long position in the underlying
futures contract or underlying physical commodity is subject to the full
risk of a decline in price of the underlying position. In exchange for the
premium received for granting a call option, the option grantor gives up
all of the potential gain resulting from an increase in the price of the
underlying futures contract or underlying physical commodity above
the option strike price if the option is exercised against the grantor.
The grantor of a put option who does not have a short position in
the underlying futures contract or underlying physical commodity
(i.e., commitment to sell the physical) is subject to risk of loss
should the price of the underlying futures contract or underlying
physical commodity decrease by an amount in excess of the premium
received for granting the put option.
The grantor of a put option on a futures contract who has a short position
in the underlying futures contract is subject to the full risk of a rise
in the price in the underlying position. In exchange for the premium
received for granting a put option on a futures contract, the option
grantor gives up all of the potential gain resulting from a decrease in
the price of the underlying futures contract below the option strike price
if the option is exercised against the grantor. The grantor of a put
option on a physical commodity who has a short position (e.g., commitment
to sell the physical) is subject to the full risk of a rise in the
price of the physical commodity which must be obtained to fulfill the
commitment reduced by the premium received for granting the put. In
exchange for the premium, the grantor of a put option on a physical
commodity gives up all the potential gain which would have resulted
from a decrease in the price of the commodity below the option strike
price upon exercise or expiration of the option.
(2) Description of Commodity Options.
Prior to entering into any transaction involving a commodity option,
an individual should thoroughly understand the nature and type of
option and the underlying futures contract or underlying physical
commodity involved. The futures commission merchant or the introducing
broker is required to provide, and the individual contemplating
an option transaction should obtain, a description of the following:
(i) the futures contract or the physical commodity which is the subject
of the option;
(ii) the quantity of the underlying futures contract or underlying physical
commodity which may be purchased or sold upon exercise of
the option or, if applicable, whether exercise of the option will be
settled in cash;
(III) the procedure for exercise of the option contract, including the
expiration date and latest time on that date for exercise (the latest
time on an expiration date when an option may be exercised may
vary; therefore, option market participants should ascertain from
their futures commission merchant or their introducing broker the
latest time the firm accepts exercise instructions with respect to a
particular option);
(iv) a description of the purchase price of the option including the
premium, commissions, costs, fees and other charges (since commissions
and other charges may vary widely among futures commission
merchants and among introducing brokers, option customers
may find it advisable to consult more than one firm when
opening an option account);
(v) a description of all costs in addition to the purchase price which
may be incurred if the commodity option is exercised, including the
amount of commissions (whether termed sales commissions or otherwise),
storage, interest, and all similar fees and charges which
may be incurred;
(vi) an explanation and understanding of an option grantor's initial
margin requirement and obligation to provide additional margin in
connection with such an option position, or a position in a futures
contract, if applicable;
(vii) a clear explanation and understanding of any clauses in the
option contract and to any terms included in the option contract
explicitly or by reference which might affect the customer's obligation
under the contract including any policy of the futures commission
merchant or the introducing broker or rule of the exchange on which
the option is traded that might affect the customer's ability to fulfill the
option contract or to offset the option position in a closing purchase
or closing sale transaction (for example, due to unforeseen circumstances
that require suspension or termination of trading); and
(vii) if applicable, a description of the effect upon the value of the
option position that could result from limit moves in the underlying
futures contract.
20
(3) The Mechanics of Option Trading.
Before entering into any exchange-traded option transaction, an
individual should obtain a description of how commodity options
are traded.
Option customers should clearly understand that there is no guarantee
that option positions may be offset by either a closing purchase
or closing sale transaction on an exchange. In this circumstance,
option grantors could be subject to the full risk of their positions until
the option positions expire, and the purchaser of a profitable option
might have to exercise the option to realize a profit.
For an option on a futures contract, an individual should clearly
understand the relationship between exchange rules governing
option transactions and exchange rules governing the underlying
futures contract. For example, an individual should understand that
action, if any, the exchange will take in the option market if trading in
the underlying futures market is restricted or the futures prices have
made a "limit move."
The individual should understand that the option may not be subject
to the daily price fluctuation limits while the underlying future may
have such limits, and, as a result, normal pricing relationships
between options and the underlying future may not exist when the
future is trading at its price limit. Also, underlying futures positions
resulting from exercise of options may not be capable of being offset
if the underlying future is at a price limit.
(4) Margin Requirements.
Commodity Futures Trading Commission rules require the purchaser
of an option to pay the full option premium when the option position
is opened. Before granting an action, an individual should fully
understand the applicable margin requirements, and particularly
should be aware of the obligation to put up additional margin money
in the case of adverse market moves.
(5) Profit Potential of an Option Position.
An option customer should carefully calculate the price which the
underlying futures contract or underlying physical commodity would
have to reach for the option position to become profitable. This price
would include the amount by which the underlying futures contract
or underlying physical commodity would have to rise above or fall
below the strike price to cover the sum of the premium and all other
costs incurred in entering into the exercising or closing (offsetting)
the commodity option position.
Also, an option customer should be aware of the risk that the
futures price prevailing at the opening of the next trading day may
be substantially different from the futures price which prevailed
when the option was exercised. Similarly, for options on physicals
that are cash settled, the physicals price prevailing at the time the
option is exercised may differ substantially from the cash settlement
price that is determined at a later time. Thus, if a customer does not
cover the position against the possibility of underlying commodity
price change the realized price upon option exercise may differ substantially
from that which existed at the time of exercise.
(6) Deep-Out-Of-The-Money Options.
A person contemplating purchasing a deep-out-of-the-money option
(that is, an option with a strike price significantly above, in the case
of a call, or significantly below, in the case of a put, the current price
of the underlying futures contract or underlying physical commodity)
should be aware that the chance of such an option becoming profitable
is ordinarily remote.
On the other hand, a potential grantor of a deep-out-of-the-money
option should be aware that such options normally provide small
premiums while exposing the grantor to all of the potential losses
described in section (1) of this disclosure statement.
(7) Fees.
Alaron Trading Corporation charges a fee for options to each customer,
Introducing Broker, or Commodity Trading Advisor. Customers
of Introducing Brokers or Commodity Trading Advisors may or may not
be charged a fee which differs from this basic Alaron Trading
Corporation fee. You should check with your broker to determine the
exact amount of the fee which you are to be charged.
(8) Glossary of Terms.
(i) Contract market - Any board of trade (exchange) located in the
United States which has been designated by the Commodity
Futures Trading Commission to a list of futures contract or commodity
option for trading.
(ii) Exchange-traded option; put option; call option - The options discussed
in this disclosure statement are limited to those which may
be traded on a contract market. These options (subject to certain
exceptions) give an option purchaser the right to buy in the case of
a call option, or to sell in the case of a put option, a futures contract
or the physical commodity underlying the option at the stated strike
price prior to the expiration date of the option. Each exchange-traded
option is distinguished by the underlying futures contract or
underlying physical commodity, strike price, expiration date, and
whether the option is a put or a call.
(iii) Underlying futures contract - The futures contract which may
be purchased or sold upon the exercise of an option on a
futures contract.
(iv) Underlying physical commodity - The commodity of a specific
grade (quality) and quantity which may be purchased or sold upon
the exercise of an option on a physical commodity.
(v) Class of options - A put or a call covering the same underlying
futures contract or underlying physical commodity.
(vi) Series of options - Options of the same class having the same
strike price and expiration date.
(vii) Exercise price - See strike price.
(viii) Expiration date - The last day when an option may be exercised.
(ix) Premium - The amount agreed upon between the purchaser or
seller for the purchase or sale of a commodity option.
(x) Strike price - The price at which a person may purchase or sell
the underlying futures contract or underlying physical commodity
upon exercise of a commodity option. This term has the same
meaning as the term "exercise price."
(xi) Short option position - See opening sale transaction.
(xii) Long Option position - See opening purchase transaction.
(xiii) Types of options transactions -
(A) Opening purchase transaction - A transaction in which an
individual purchases an option and thereby obtains a long option
position.
(B) Opening sale transaction - A transaction in which an individual
grants an option and thereby obtains a short option position.
(C) Closing purchase transaction - A transaction in which an individual
with a short option position liquidates the position. This is
accomplished by a closing purchase transaction for an option of
the same series as the option previously granted. Such a transaction
may be referred to as an offset transaction.
(D) Closing sale transaction - A transaction in which an individual
with a long option position liquidates the position. This is accomplished
by a closing sale transaction for an option of the same
series as the option previously purchased. Such a transaction
may be referred to as an offset transaction.
(xiv) Purchase price - The total actual cost paid or to be paid, directly
or indirectly, by a person to acquire a commodity option. This
price includes all commissions and other fees, in addition to the
option.
(xv) Grantor, writer, seller - An individual who sells an option. Such a
person is said to have a short position.
(xvi) Purchaser - An individual who buys an option. Such a person
is said to have a long position.
PLEASE SIGN OPTIONS DISCLOSURE STATEMENT ON CUSTOMER
SIGNATURE FORM, PAGE 13.
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Becoming Fluent in Options on Futures
If you've ever studied a second language, you know how hard it can be. But once you learn, say, Spanish as a second language - learning Italian as a third would be much easier since both have common Latin roots. To get facility with Italian as a third language, you would need only to grasp minor changes in word forms and syntax. Well, the same could be said for learning options.
For most people, learning about stock options is like learning to speak a new language, which requires wrestling with totally unfamiliar terms. But if you already have some experience with stock options, understanding the language of options on futures becomes easy. In fact, basic concepts such as delta, time value and strike price apply the same way to futures options as to stock options, except for slight variations in product specifications, essentially the only hurdle to surmount.
In this article, we provide an introduction to the world of S&P 500 futures options that will reveal to you how easy it is to make the transition from to options on futures (also known as commodity or futures options), where a world of potential profit awaits.
Stock Index Options on Futures
The first thing that probably throws a curve ball at you when initially approaching options on futures is that you may not be familiar with a futures contract, the underlying instrument upon which options on futures trade. Recall that for stock options, the underlying is the equity issue (e.g. IBM call options trade on IBM stock). Since most investors understand how to interpret stock prices, figuring out the underlying is easy.
When learning futures options, on the other hand, traders new to any particular market (bonds, gold, soybeans, coffee or the S&Ps) need to get familiar not only with the option specifications but also with the product specifications of the underlying futures contract. These, however, are insignificant obstacles in today's online environment, which offers so much information just a click away. This article will hopefully interest you in exploring these exciting markets and new trading opportunities.
To illustrate how options on futures work, I will explain the basic characteristics of S&P 500 options on futures, which are the more popular in the world of futures options. Although these are cash-based futures options (i.e. they automatically settle in cash at expiration), the logic of S&P futures options, like all futures options, is the same as that of stock options. S&P 500 futures options, however, offer unique advantages; for example, they can allow you to trade with superior margin rules (known as SPAN margin), which allow more efficient use of your trading capital.
Perhaps the easiest way to begin getting a feel for options on futures is simply to look at a quotes table of the prices of S&P 500 futures and the prices of the corresponding options on futures. Essentially, the principle of the pricing of S&P futures is the same as that of the price behavior of any stock. You want to buy low and sell high. In other words, if the S&P futures rise, the value of the contract rises and vice versa if the price of S&P futures fall.
There is, however, a key difference between futures and stock options. A one-dollar change in a stock option is equivalent to $1 (per share), which is uniform for all stocks. With S&P futures, a one-dollar change in price is worth $250 (per contract), and this is not uniform for all futures and futures options markets. While there are other issues to get familiar with - such as the fair value of S&P futures and the premium on the futures contract - these related concepts are insignificant in practice and for what you need to understand for most option strategies.
Aside from the distinction of price specification, there are some other important characteristics of S&P options that are important. Since these options trade on the underlying futures, the level of S&P futures, not the S&P 500 stock index, is the key factor affecting prices of options on S&P futures. Volatility and time-value decay of course also play their part, just like they affect a stock option.
Let's take a closer look at S&P futures and option prices, particularly at how changes in the price of futures affect changes in the prices of the option. First let's look at S&P futures product specifications, which are presented in fgure 1.
S&P futures trade in "dime-sized" ticks (the minimum price change intervals), worth $25 each, so a full point (one dollar) is equal to $250. The active month is known as the "front-month contract", and it is the first of the three delivery months listed in figure 2. The last trading day for all S&P futures contracts is on the Thursday before expiration, which is on the third Friday of the contract month. By looking at figure 2 below, we can see some actual prices for the S&P 500 futures, taken from the close of daily trading (pit-session) on Jun 12, 2002.
Figure 2 - Settlement prices for June 12, 2002
The Jun S&P futures contract in figure 2, for example, settled at 1020.20 on this particular day. The point change of +6.00 is equivalent to a gain of $1,500 per single contract (6 x $250 = $1,500). It is worth noting that the S&P futures and the S&P 500 stock index will trade nearly identically, but the S&P futures will trade with a slight premium attached.
Understanding S&P Futures Options
Now let's turn to some of the corresponding options. Like for nearly all options on futures, there is a uniformity of pricing between the futures and options. That is, the value of a one-dollar change in premium is the same as a one-dollar change in the futures price. This makes things easy. In the case of S&P 500 futures options and their underlying futures, a one-dollar change is worth $250. To provide some real examples of this principle, I have selected in figure 3 the 25-point interval strike prices of some out-of-the-money puts and calls trading on the Jun S&P futures.
Just as we would expect for stock put and call options, the delta in our examples below is positive for calls and negative for puts. Therefore, since the Jun S&P futures rose by six points (at $250 per point, or dollar), the puts fell in value and the calls rose in value. The strikes farthest from the money (925 put and 1100 call) will have the lower delta values, and those nearest the money (1000 put and 1025 call) have higher delta values. Both the sign and the size of the change in dollar value for each option make this clear. The higher the delta value the greater the option price change will be affected by a change of the underlying S&P futures.
Figure 3 - S&P option prices at settlement on June 12, 2002
For example, we know that the Jun S&P futures rose six points to settle at 1020.20. This settlement price is just shy of the Jun call strike price of 1025, which increased in value by $425. This near-the-money option has a higher delta (delta = 0.40) than options farther from the money, such as the call option with a strike price of 1100 (delta = 0.02), which increased in value by only $12.50. Delta values measure the impact further changes in the underlying S&P futures will have on these option prices. If, for instance, the underlying Jun S&P futures were to rise 10 more points (provided there is no change in time-value decay and volatility), the S&P call option in figure 3 with a strike price of 1025 would rise by four points, or gain $1,000.
The same but reverse logic applies to the S&P put options in figure 3. Here we see the put option prices declining with a rise in the Jun S&P futures. The nearest-the-money option has a strike price of 1000, and its price fell by $600. Meanwhile, the farther-from-the-money put options, such as the option with a strike price of 925 and delta of -0.04, lost less, a value of $225.
Conclusion
While there are many ways to trade using these options, many traders prefer to be a net seller of options (which is featured in How to Profit from Time-Value Decay). Whether you prefer to buy or write (sell) stock options using either simple spreads or more complex strategies, you can, with the basics presented here, easily adapt many of your favorite strategies to S&P options on futures.
As for other options on futures markets, you'll need to get familiar with their product specifications - such as trading units and tick sizes - before doing any trading. Having said that, however, I am sure you will find that becoming fluent in a second options language is not as difficult as you might initially have thought.
By John Summa, CTA, OptionsNerd.com
John Summa is founder and president of OptionsNerd.com and a registered commodity trading advisor (CTA) with the National Futures Association. He has coauthored Options on Futures: New Trading Strategies and Options on Futures Workbook (John Wiley & Sons, 2001) and more recently wrote Trading Against The Crowd: Profiting From Fear and Greed in Stock, Futures and Options Markets (John Wiley & Sons, 2004). Founded in 1998, OptionsNerd.com is devoted to providing educational support to options traders, option trading advisories and managed futures account services. A former professional skier and a PhD-trained economist, Mr. Summa operates his own delta-neutral options trading CTA program. If you wish to get trained by John Summa, he offers small-group seminars in the USA, Asia-Singapore, Canada, and Australia. Visit OptionsNerd.com for more info.
There is risk of loss trading futures and options. Past performance does not guarantee future results. Trade with risk capital only.