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Thanks for the ideas, Michael. I am a little hung up on margin and
liquidity issues. LIFFE sets margins on the stock futures (Universal
Stock Futures) based on the volatility of the underlying. Their margins
range from about 13-18%, last I knew. They have their own policies for
adjusting for corporate actions (e.g., splits, acquisitions, spin-offs,
buybacks,etc). In the US, the joint regulation of ssf's by the cftc and
sec will undoubtedly result in higher margin requirements, maybe 30-40%.
I don't think the US competitive edge will be in margins, but in broader
listings.
Regards,
Monte
> Michael Berger wrote:
>
>
> Good points.
> My thinking on protection below.
>
> ----- Original Message -----
> From: "Monte C. Smith" <mcs@xxxxxxxxxxx>
> To: "Michael Berger" <mberger@xxxxxxxx>
> Cc: "OmegaList" <omega-list@xxxxxxxxxx>
> Sent: Saturday, May 26, 2001 6:38 PM
> Subject: Re: need some ideas to (dis)prove an assumption
>
> >
> > Hello Michael,
> >
> >
> >
> > Michael Berger wrote:
> > >
> > > Stock Futures might replace options on the basis of:
> > >
> > > Margins, liquidity, premiums, increased spreading, possibly
> > > better/different settlement terms (I'm guessing a little
> > > here).
> >
> > Cash Settlement.
> >
> >
> > >
> > > Without the same concern for time decay, participation
> > > should increase dramatically, both on the part of investors
> > > / speculators, but also on the part of hedgers.
> >
> >
> > Good thought about the absence of time decay. Options aren't for
> > everyone.
> >
> >
> > >
> > > With the above, there will probably be increased
> > > institutional activity, on both sides.
> >
> > Institutional activity should be heavy, especially now, when they
> are
> > looking to cut expenditures. I wonder how many SP 500 stocks
> contracts
> > will be written for. The futures may become the leading price
> discovery
> > mechanism, so new indexes need to be created. More than 85% of sp500
> > stocks are NYSE-listed.
> >
> >
> > >
> > > Better collateral value will be possible on stocks hedged
> > > with futures, rather than options, as more protection is
> > > provided.
> >
> > What protection did you have in mind?
> I was thinking an institution long stock & short the stock future,
> would be in a virtually fully protected hedge position. Thus little
> money would have to be tied-up in the position.
>
> Compare this to long stock, but short an option. This protection
> generally only covers a small drop on the underlying stock, so more
> funds would be required, or held in reserve. And banks, etc. would
> not be willing to loan as much on the transaction. (This additionl
> risk for a "partial" hedge adds to option premiums.)
>
> From the flip side, companies that have to fund future stock options
> could probably do it more efficiently in the stock futures market,
> with less risk, rather than selling puts as they often did. Selling
> puts worked wonderfully while the market kept going up, but has
> created problems when the mkt took a big hit.
>
> Again, just some thoughts.
>
> Regards,
> >
> >
> > >
> > > All the advantages should multiply geometrically.
> >
> >
> > Yes, my sense is stock futures are going to take off, and leave
> wakes
> > in the sp futures.
> >
> >
> > >
> > > I don't trade options, so I'm sure I only scratched the
> > > surface on the benefits.
> > >
> > > Remember the current Futures markets (grains, etc.) started
> > > as option-type forward contracts.
> >
> > I haven't traded options on stocks, but stock futures look good to
> me.
> >
> > Regards,
> > Monte
> >
> >
> > >
> > > ----- Original Message -----
> > > From: "Monte C. Smith" <mcs@xxxxxxxxxxx>
> > > To: "Michael Berger" <mberger@xxxxxxxx>
> > > Cc: "OmegaList" <omega-list@xxxxxxxxxx>
> > > Sent: Saturday, May 26, 2001 4:37 PM
> > > Subject: Re: need some ideas to (dis)prove an assumption
> > >
> > > >
> > > > Do you think stock futures will displace options on the
> > > basis of
> > > > margins?
> > > >
> > > > Monte
> > > >
> > > >
> > > >
> > > > Michael Berger wrote:
> > > > >
> > > > > There have been a number of recent threads on stock
> > > option
> > > > > this, stock option that.
> > > > >
> > > > > Once individual stock futures become active, which may
> > > be a
> > > > > year away, don't you think much of current stock option
> > > > > testing will be moot?
> > > > >
> > > > > Just a thought.
> > > > >
> > > > > ----- Original Message -----
> > > > > From: "caw" <cwest@xxxxxxxxxxxx>
> > > > > To: <prosys@xxxxxxxxxxxxxxxx>; "OmegaList@xxxxxxx Com"
> > > > > <omega-list@xxxxxxxxxx>
> > > > > Sent: Saturday, May 26, 2001 3:51 PM
> > > > > Subject: RE: need some ideas to (dis)prove an assumption
> >
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