Futures

1
Futures

• Seller guarantees delivery of something at a set
  price for a fixed period of time (usually lt90
  days)
• Buyer can demand delivery at price until contract
  expires
• If spot price is below contracted price, seller
  benefits seller is said to be SHORT
• If spot price is above contracted price, buyer
  benefits buyer is said to be LONG

(c) 2001 by Russell G. Todd
2
2 Kinds of Futures

• Physical futures contracts corn, oil, silver,
  cattle, etc.
• Deliveries are ownership papers, not 5,000
  bushels of wheat
• Financial futures currencies, stock indices,
  bond prices, etc.
• Deliveries are in cash--difference between
  contracted price and spot price

(c) 2001 by Russell G. Todd
3
How Futures Work

• Contracts are bought on MARGINa percentage of
  the purchase price
• Wheat is 3.50 a bushel buy 5,000 bushel
  contract valued at 17,500
• If margin is 10, only 1,750 to buy
• Margin money must be kept constant
• If wheat goes to 3.25 a bushel, contract worth
  16,250, down 1,250
• 500 left in margin account
• Margin call of 1,250 to keep it constant

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Uses of Futures

• Buyers (e.g., corn for Post Toasties) can lock in
  a purchase price
• Sellers (corn farmer) can lock in selling price
• Speculators can go long or short, win or lose big
  on leverage
• Traded on CBT, CME, PBOT, NYFE, etc.

(c) 2001 by Russell G. Todd
5
Wednesday May 30 715 PM ET   Wednesday's
Commodities Roundup   NEW YORK (Dow Jones News) -
Nearby gasoline futures plunged at the New York
Mercantile Exchange Thursday as the cash market
skidded ahead of futures contract
expiration.   Selling dominated the gasoline and
crude markets Tuesday amid refinery restarts, big
players liquidating positions, and others rolling
positions into deferred months.   Iraq hasn't
changed anything yet, but they bear watching,''
said Bill O'Grady, analyst at AG Edwards.   Crude
prices had fallen earlier Wednesday on news Iraq
is preparing 13 million barrels in crude
shipments from Turkey's Ceyhan terminal during
the first half of June.   After markets closed,
industry data for the week ended May 25 showed
increasing U.S. inventories of motor gasoline and
distillate stocks, which include heating oil and
diesel fuel, but a decline in the amount of crude
oil stocks.   Unleaded gasoline futures for June
dropped 3.46 cents a gallon to 1.04 a gallon and
July crude fell 11 cents to 28.55 a
barrel.   Natural gas futures on the New York
Mercantile Exchange settled at 3.981 per 1,000
cubic feet, a gain of 17.1 cents.   June heating
oil rose .13 cent to 77.60 cents a
gallon.   Brent crude from the North Sea for
delivery in July fell 3 cents to 29.14 per
barrel on London's International Petroleum
Exchange.   After markets closed Wednesday, the
American Petroleum Institute reported that U.S.
inventories of crude oil fell 3.9 million barrels
to 321.9 million barrels from 325.9 million
barrels.  
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After markets closed Wednesday, the American
Petroleum Institute reported that U.S.
inventories of crude oil fell 3.9 million barrels
to 321.9 million barrels from 325.9 million
barrels.   Distillate fuel stocks, which include
heating oil and diesel fuel, rose by 1.9 million
barrels to 103 million barrels. Last year at this
time, the amount of inventory was at 99.9 million
barrels.   The U.S. motor gasoline inventory rose
by more than 1.6 million barrels to 206.1 million
barrels, according to API, nearly 3 percent
higher than the 200.5 million barrels at this
time last year.   In other commodity markets,
gold futures on the Comex division of the New
York Mercantile Exchange were trampled by a
stampede of selling on Wednesday, rendering the
term support levels'' virtually meaningless on
their plunge lower. The leading June contract
surrendered 8.20 to close at 265.70 a troy
ounce.   The rout took gold prices within 15 of
20-year lows, a level from which they had
painstakingly built themselves up over the past
two months. That left many wondering whether the
298 high glimpsed just nine days ago had been an
illusion.   World raw sugar futures declined on
the Coffee, Sugar Cocoa Exchange after a
sell-off led by speculative commodity funds. The
July contract fell 0.15 cent to 8.59 cents a
pound after touching a one-month low of 8.40
cents.   Cocoa futures fell on the CSCE on
selling by speculative funds, although buying by
consumers brought prices up from their
lows.   The July contract fell 39 to 964 a
metric ton, after hitting a one-month low of
959.
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Options

• Call buyer pays premium for right to buy at
  fixed price for fixed time (usually lt 90 days).
  Position is LONG.
• Call seller gets premium, is obligated to deliver
  at the price until expiry. Position is SHORT.
• Put buyer pays premium for right to sell at fixed
  price until expiry. SHORT.
• Put seller takes premium, is obligated to deliver
  at the price until expiry. LONG.
• Options stock price is called STRIKE PRICE

(c) 2001 by Russell G. Todd
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Kinds of Options

• Options on commodities contracts
• On currencies
• On stocks, stock index futures
• On interest rates
• On bond futures
• A contract is for 100 options
• Traded on commodities exchanges
• Option prices vary continually, like stocks

(c) 2001 by Russell G. Todd
9
How an Option Works

• Investor buys 10 call contracts on stock ZZZ.
  Stock at 55, strike 60, call at 75 cents, so
  750 goes to seller.
• Stock goes to 62, option price goes to 3. Buyer
  can either buy at 60 and sell at 62, or can
  just sell the contract for 3.
• Trading contract is more profitablebig leverage,
  like futures.

(c) 2001 by Russell G. Todd
10
Uses for Options

• Locking in prices, speculatinglike futures
• To ensure against lossesbuy a put on a stock
  already owned
• Sell calls on stocks owned to generate income
• Transaction costs are high

(c) 2001 by Russell G. Todd
11
Option Price Movements

• An options price is
• --Time premiumhow much left.
• -- Intrinsic value if in the money.
• -- Investor view of risk, volatility.
• Two kinds of volatility
• -- Actualhow much asset price jumps around.
• -- Impliedhow much option prices are
  jumping around.

(c) 2001 by Russell G. Todd
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Options Report Trading Reflects Market's
Hesitation  By Kopin Tan  06/01/2001
 1530   NEW YORK -(Dow Jones)- Option
volatility fell as stocks edged ahead gingerly.
But option trading lacked momentum and seemed to
mirror investors' agonizing lack of consensus
about how stocks will perform over the next few
months.   Many traders and investors held back
as they sought to make sense of Friday's
confusing flux of economic data and earnings
news. The unemployment rate fell slightly instead
of rising as many had anticipated, which some
consider a welcome sign with positive
ramifications for the economy and consumer
spending.   But early earnings warnings from
BellSouth Corp. and DuPont Co. rattled investors
and reminded them that the worst isn't over. With
more companies - including BellSouth and, earlier
this week, Sun Microsystems Inc. - blaming their
woes in part on overseas operations, investors
now have more reason to fret that the rot is
spreading.   Against this backdrop, many
investors opted to play it safe. Many didn't
stray far beyond tweaking their portfolios and
hedging their bets. Here and there, investors
picked spots to sell options against stock -
which, while it generates income and boosts
returns, isn't without risks since sellers of
options take on obligations and could be caught
if the market turns.   With the Standard
Poor's 100 Index trading in a tight range, the
Chicago Board Options Exchange's market
volatility index, or VIX, dipped 2.25 to 23.71.
VIX measures certain SP 100 option prices to
gauge investor sentiment and typically ranges
between 20 and 30, although it tended to exceed
the top of that range earlier this year.
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Citigroup's longer-term calls traded briskly
Friday, with at least one institutional investor
focused on buying January 60 calls that expire
2003, confirmed a trader at Wolverine Trading,
the specialist for Citigroup options at the
American Stock Exchange.   It isn't known what
drove the call buying, but these out-of-the-money
calls gain in value if the underlying stock
appreciates, and the investor may be making a
longer-term bet on the banking giant.
  Citigroup most recently was ahead 1.07 to
52.32. These January 60 calls that expire 2003
traded more than 10,000 contracts, compared with
open interest of 3,597, and their implied
volatility were slightly below their historical
volatility. The calls rose 50 cents to 6.80 at
the CBOE.   Bank One Corp.'s calls, too, traded
actively, with some investors opening new
positions and buying just out-of-the-money
November 40 calls. With the stock down 26 cents
to 39.34, 3,381 contracts of the November 40
calls traded, compared with open interest of
2,113. These calls were at 2.65 at the
Philadelphia Stock Exchange.   Texas
Instruments' options, on the surface, also showed
possibly bullish expectations Friday. The
put/call this session stood at a low 0.08, with
nearly 900 puts traded to about 11,414 calls,
according to 1010WallStreet.com. The
dollar-weighted put/call ratio also is low, at
about 0.09.   Investors appeared focused on
buying the October 35 calls, which traded 3,975
contracts at the CBOE and the Amex. With Texas
Instruments unchanged at 34.12, these just
out-of-the-money calls were down 20 cents to
4.30 at the CBOE. Open interest was 4,342.
  ADC Telecommunications' July 5 puts continued
to trade heavily as investors continued selling
these out-of-the-money puts. These investors earn
some income and either does not expect ADC
Telecom to fall below 5 by mid-July or are
willing to buy stock at that price.   The stock
most recently was ahead 7 cents to 7.75. The
July 5 puts edged down 5 cents to 10 cents on
CBOE volume of 10,200 contracts, compared with
open interest of 30,199.   -Kopin Tan, Dow Jones
Newswires 201-938-2202 kopin.tan_at_dowjones.com