|
PureBytes Links
Trading Reference Links
|
O.K.
Point number one.....Stocks and commodities essentially offer the
identical payoff. The payoff is linear and if you graphed a P/L you
would gett a 45degree line. In cash markets...stocks/commodities you
have only three choices....LONG>>SHORT>>OR CASH. The user of a futures
contract is shooting for the payoff of the cash instrument(THE
STOCK>>THE BOND>>THE PHYSICAL COMMODITY>>>THE INDEX....WHATEVER). The
future provides leverage and has all the costs bundled into the price
and this would be viewed as the future's premium. A cash instrument
with a $100 value and a 5% carry would have a future with a fair value
of 105. If the cash instrument paid a cash flow(dividends on stocks as
an example)of say 2% the future would have a fair value of 103. Short
term inbalances would cause the future to trade at prices other than the
expected "103". If an effective cash andd carry arb can be done with
the future vs the cash you would have pretty good pricing of the
future...ie S & P, BONDS, etc. Where the cash and carry is
difficult...oil, lumber, etc you get poorer pricing and accordingly
poor price discovery.
Options are all the above plus more, but they have a cost. Buying a
call and selling a put on a stock IS THE STOCK EXACTLY with the cost of
carry bundled into it. So first anything you can do with Stock or a
futures contract you can do with option.....Now some disstortions may
exist as to margins..upticks...trading rules..limits etc....but you can
do the same stuff...EXCEPT with option you can do more.
You could buy a call instead of going long the underlying...BUT WITH
OPTIONS THERE IS A COST. THAT COST HAS TWO COMPONENTS> CARRY and
Volatility...these add up to what is called time premium.
100 Stock 5% cost of money 2% dividend a year call would cost at
least $3.00(depending on streike)if it representted a 100 shares. That
$3 would arise from the carry on the stock. The call would actually
sell for more than $3..the difference is the premium paid for
volatility(and imbedded in that premium is the limited risk feature). A
snapshot of this volatility premium would be the price of the
put,,,which is a measure of risk. Carry + Put = Call an instrument with
limited risk and unlimited upside. OPTIONS GIVE YOU OPTION(I should
have sservicemarked that years ago), BUT ACCORDINGLY THEY COST MORE.
With Options you can create almosst any expected risk/reward payoff you
want. Options aloss provide a way for a society with capital markets to
TRANSFER RISK from parties who don't want to parties who will acccept
it..in essence you create an insurance market.
NO one instrument is superior or more wholesome. They are both
different andd similar. In good markets where all there exist and
trading friction is low it becommes very very easy to trade and to
facilitate everyone from small traders to large traders...PROBABLY THE
TEXTBOOK MARKETS ARE THE OTC FX and the US 30 year bond...although the
German BUND is getting close....and come to think of it the CBOT is
thinking about a bigger 30 year contract...but I'm digressing.
Thats the issue of STOCK..FUTURES..OPTIONS
|