Basic Options

Basic Options
Teacher: Jeff Fichtelman OPT 101 Approximate Length: 1 hour
OPT 101: Basic Options
Table of Contents
Prerequisite Knowledge Basic Definitions Anatomy of an Option Basic Price Relationships Basic Option Strategies Recommended Courses Exam
Table of Contents
Prerequisite Knowledge
Basic Definitions Anatomy of an Option Basic Price Relationships Basic Option Strategies Recommended Courses Exam
Prerequisite knowledge: Basic understanding of grain futures Prerequisite course suggestions: None
Table of Contents
Basic Definitions
Grain Futures Acronyms Option Contract Long Short Call Option Put Option Options on Futures Moneyness Options Overview
Basic Definitions
Anatomy of an Option Basic Price Relationships Basic Option Strategies Recommended Courses Exam
Table of Contents
Grain Futures Acronyms

Basic Definitions
Basic Definitions
Grain Futures
C = Corn S = Soybeans W = Wheat O = Oats
Futures Months (cont.)

Q U V X Z = August = September = October = November = December
Futures Months
F = January G = February H = March J = April K = May M = June N = July
Years
11 = 2011 12 = 2012
Examples
CZ11 = Dec 2011 Corn SX12 = Nov 2012 Soybeans WN13 = July 2013 Wheat
Table of Contents
Option Contract
Basic Definitions
Basic Definitions
Definition
Two Parties
Buyer of Option Seller of Option
Buyer has Right to Exercise Contract Seller is Obligated if Buyer Exercises Contract Buyer pays Seller premium for taking on risk
Example 1 Option on a House Example 2 Car Insurance
Table of Contents
Long
Basic Definitions
Basic Definitions
Definition
Makes money in a rising market Also known as Buyer or to buy Farmers are typically long their cash crop
Buy Price
Where buyer goes long
Table of Contents
Short
Basic Definitions
Basic Definitions
Definition
Makes money in a falling market Also known as Seller or to sell Farmers typically sell (go short) futures to offset their long cash crop
Sale Price
Where seller goes short
Table of Contents
Call Option
Basic Definitions
Basic Definitions
Definition
Buyer of Call:
Right to go Long the underlying futures at the strike price Pays seller defined premium
Seller of Call:
Obligated to go Short the underlying futures at the strike price Receives a defined premium
Example CZ11 4.50 Call @ 25c

Buyer of Call has right to go long CZ11 @ 4.50 Seller of Call is required to go short CZ11 @ 4.50 Buyer of Call pays Seller of Call 25c for Right to go Long
Table of Contents
Put Option
Basic Definitions
Basic Definitions
Definition
Buyer of Put:
Has Right to go Short the underlying futures at the strike price Pays seller defined premium for this Right
Seller of Put:
Is Obligated to go Long the underlying futures at the strike price Receives a defined premium from the buyer to take on this obligation
Example CZ11 4.00 Put @ 15c

Buyer of Put has right to go short CZ11 @ 4.00 Seller of Put is required to go long CZ11 @ 4.00 Buyer of Put pays Seller of Put 15c for Right to go Short
Table of Contents
Options on Futures
Basic Definitions
Basic Definitions
Definition
One Option Contract = One Futures Contract Options specify which futures contract the seller will need to provide to the buyer
Examples
CZ11 4.50 Call
December 2011 Corn Futures
CK11 5.00 Put

May 2011 Corn Futures
SN11 13.00 Call

July 2011 Soybean Futures
Table of Contents
Moneyness
Basic Definitions
Basic Definitions
In-the-money
Calls = If Strike < Futures (Buy Low) Puts = If Strike > Futures (Sell High)
At-the-money
Calls / Puts = If Strike = Futures
Out-of-the-money
Calls = If Strike > Futures (Buy High) Puts = If Strike < Futures (Sell Low)
Table of Contents
Option Overview Part 1

Basic Definitions
Basic Definitions
The Right or The Obligation
Option Contract Call

Righ ?? Right
Put
Righ ?? Right
Option Trade
Buy Sell
Obligation Obligation igation ?? ??
Table of Contents
Option Overview Part 2

Basic Definitions
Basic Definitions
Long or hort Und rlying Futur s?
Option Contract Call Long ?? Short ?? Put

?? Short
Option Trade
Buy Sell
Long ??
Table of Contents
Prerequisite Knowledge Basic Definitions
Anatomy of an Option
How it s written Number of Contracts Underlying Commodity Strike Price Call or Put Option Premium
Time Premium Intrinsic Value
Basic Price Relationships Basic Option Strategies Recommended Courses Exam
Expiration Date American Options

vs. European Options
Table of Contents
How it s Written
+20 CZ11 4.50 Call @ 25c +100 SX12 14.00 Calls @ 55c -5 WN11 6.00 Put @ 30c -15 CH12 5.00 Call @ 30c
Table of Contents
Number of Contracts
+20 CZ11 4.50 Call @ 25c Definition

Number of option contracts to be bought (+) or sold (-) Equals number of underlying futures Can not be written down by # of bushels
i.e. +10,000 bu. CZ11 4.50 Call @ 25c (WRONG) Note: 1 contract = 5,000 bushels (grain options on futures C, S, W, O)
Options can not be traded in odd lots

Odd Lots = increments not divisible by 5,000 (i.e. 7,500)
Example above
Buying ( going long ) 20 contracts, or 100,000 bushels
Table of Contents
Underlying Commodity

Defines which futures contract will be assigned to the buyer of an option Refer to the Grain Futures Acronyms slide
Example above
December ( Dec ) 2011 Corn
Table of Contents
Strike Price

Defines the price at which the futures are transacted
Example above
The buyer of this call has the right to go long December 2011 corn at $4.50 The seller of the call is obligated to go short December 2011 corn at $4.50 if the buyer exercises his/her right
Table of Contents
Call or Put

Defines whether the option is a call or a put
Example above
Call Option (i.e. Call )
Table of Contents
Option Premium

What the buyer of an option pays the seller
Grain Options = price per bushel (1 contract = 5,000 bushels)
Determined by a market
Highest bid (i.e. buyer) vs. Lowest offer (i.e. seller)
Can be calculated from a formula

Black-Scholes Option Pricing Formula (Theoretical price) Put-Call Parity (Arbitrage price)
Example above
25 cents per bushel ($1,250 per contract = $0.25 x 5,000 bu.)
Table of Contents
Option Premium Intrinsic Value

Definition
Calls = Max (Futures Strike, zero) Puts = Max (Strike Futures, zero)
Example 1
CZ11 4.50 Call @ $0.50 CZ11 Futures @ $4.70 Intrinsic Value = Max ($4.70-$4.50, zero) = $0.20
Example 2
CZ11 4.50 Put @ $0.30 CZ11 Futures @ $4.70 Intrinsic Value = Max ($4.50-$4.70, zero) = $0.00
Table of Contents
Option Premium Time Premium

Definition
Calls or Puts = Option Premium Intrinsic Value
Example 1
CZ11 4.50 Call @ $0.50 CZ11 Futures @ $4.70 Time Premium = $0.50 - $0.20 = $0.30
Example 2
CZ11 4.50 Put @ $0.30 CZ11 Futures @ $4.70 Time Premium = $0.30 - $0.00 = $0.30
Table of Contents
Expiration Date

Standard Options expire:
The last Friday preceding the first notice day of the corresponding futures contract month by at least two business days.
Example above
Corresponding Futures Contract Month: December 2011 First Notice Day: December 1, 2011 Option Expiration: November 25, 2011
Table of Contents
American Options

American Options can be exercised by the buyer at any time from purchase until expiration of the option contract
All standard grain options traded on the CME/CBOT are American Options
European Options can only be exercised by the buyer of an option contract on the expiration date
Example above
American Option Buyer can exercise right to go long CZ11 @ $4.50 anytime between purchase of option contract and close of trading on November 25, 2011
Table of Contents
Prerequisite Knowledge Basic Definitions Anatomy of an Option
Basic Price Relationships

In a rising market In a falling market In a sideways market

Basic Option Strategies Recommended Courses Exam
Table of Contents
In a Rising Market
Starting Prices


CZ11 5.00 Call @ 60c CZ11 5.00 Put @ 60c Starting CZ11 Futures = $5.00 Current Date = 12/24/2010 Option expiration date = November 25, 2011 CZ11 @ $5.50 (up $0.50); in 100 days (date: 4/23/2011)
CZ11 5.00 Call = $0.81 (up $0.21) CZ11 5.00 Put = $0.31 (down $0.29)
Scenarios
1. 2.
CZ11 @ $6.00 (up $1.00); in 100 days

CZ11 5.00 Call = $1.19 (up $0.59) CZ11 5.00 Put = $0.19 (down $0.41)
Table of Contents
In a Falling Market
Starting Prices


CZ11 5.00 Call @ 60c CZ11 5.00 Put @ 60c Starting CZ11 Futures = $5.00 Current Date = 12/24/2010 Option expiration date = November 25, 2011 CZ11 @ $4.50 (down $0.50); in 100 days (date: 4/23/2011)
CZ11 5.00 Call = $0.27 (down $0.33) CZ11 5.00 Put = $0.77 (up $0.17)
Scenarios
1. 2.
CZ11 @ $4.00 (down $1.00); in 100 days

CZ11 5.00 Call = $0.12 (down $0.48) CZ11 5.00 Put = $1.11 (up $0.52)
Table of Contents
In a Sideways Market
Starting Prices


CZ11 5.00 Call @ 60c CZ11 5.00 Put @ 60c Starting CZ11 Futures = $5.00 Current Date = 12/24/2010 Option expiration date = November 25, 2011 CZ11 @ $5.00; in 100 days (date: 4/23/2011)
CZ11 5.00 Call = $0.50 (down $0.10) CZ11 5.00 Put = $0.50 (down $0.10)
Scenarios
1. 2.
CZ11 @ $5.00; in 200 days (date: 7/12/2011)

CZ11 5.00 Call = $0.38 (down $0.22) CZ11 5.00 Put = $0.38 (down $0.22)
Table of Contents
Prerequisite Knowledge Basic Definitions Anatomy of an Option Basic Price Relationships
Basic Option Strategies

The P/L Chart Long Call Option Long Put Option

Recommended Courses Exam
Table of Contents
The Profit & Loss (P/L) Chart


Table of Contents
Long Call Option

Long CZ11 5.00 Call @ 65c (CZ11 = 5.00)
Scenario = 167 days from now (halfway until expiration)
Long Futures
Long CZ11 5.00 Call @ 65c Max gain =

Max gain = Long @ 5.00 Max loss = 5.00
Break-even @ 5.65 Market Price = 5.00 Max loss = 65c
Table of Contents
Long Call Option

Long CZ11 5.00 Call @ 65c (CZ11 = 5.00)

Table of Contents
Long Call Option (different strikes)

Long CZ11 5.00 Call @ 65c (Strategy 1) Long CZ11 6.00 Call @ 40c (Strategy 2)

Table of Contents
Long Put Option

Long CZ11 5.00 Put @ 65c (CZ11 = 5.00)
Short Futures
Long CZ11 5.00 Put @ 65c

Max loss = Short @ 5.00 Max gain = 5.00
Max loss = 65c Market price = 5.00 Break-even @ 4.35 Max gain= 4.35
Table of Contents
Long Put Option

Long CZ11 5.00 Put @ 65c (CZ11 = 5.00)

Table of Contents
Prerequisite Knowledge Basic Definitions Anatomy of an Option Basic Price Relationships Basic Option Strategies
Recommended Courses
Prerequisite Course Suggestions: None Recommended Next Courses: OPT 201: Intermediate Options OPT 301: Advanced Options Other Complementary Courses: EXL All: Learning the Excel Models FRM All: Any Farmer Specific Courses SPC All: Any Grain Speculator Courses TCA All: Any Technical Analysis of Grain Market Courses
Recommended Courses
Exam

Basic Options - OPT 101

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basic Options - OPT 101

Uploaded by

Copyright:

Available Formats

Teacher: Jeff Fichtelman OPT 101 Approximate Length: 1 hour

OPT 101: Basic Options

OPT 101: Basic Options

OPT 101: Basic Options

OPT 101: Basic Options

Grain Futures Acronyms

Futures Months (cont.)

OPT 101: Basic Options

Example 1 Option on a House Example 2 Car Insurance

OPT 101: Basic Options

Where buyer goes long

OPT 101: Basic Options

Where seller goes short

OPT 101: Basic Options

Example CZ11 4.50 Call @ 25c

OPT 101: Basic Options

Example CZ11 4.00 Put @ 15c

OPT 101: Basic Options

CK11 5.00 Put

SN11 13.00 Call

OPT 101: Basic Options

OPT 101: Basic Options

Option Overview Part 1

The Right or The Obligation

Option Contract Call

Obligation Obligation igation ?? ??

OPT 101: Basic Options

Option Overview Part 2

Long or hort Und rlying Futur s?

Option Contract Call Long ?? Short ?? Put

OPT 101: Basic Options

Expiration Date American Options

OPT 101: Basic Options

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

Options can not be traded in odd lots

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

Can be calculated from a formula

OPT 101: Basic Options

Option Premium Intrinsic Value

OPT 101: Basic Options

Option Premium Time Premium

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

OPT 101: Basic Options

+20 CZ11 4.50 Call @ 25c Definition

OPT 101: Basic Options

Basic Price Relationships

Basic Price Relationships

OPT 101: Basic Options

Basic Price Relationships

CZ11 @ $6.00 (up $1.00); in 100 days

OPT 101: Basic Options

Basic Price Relationships

CZ11 @ $4.00 (down $1.00); in 100 days