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<IMG height=10 src="gif00560.gif" width=10
border=0>Hi Kate,
This is from the CBOE web site <A
href="">http://www.cboe.com/OptProd/understanding_products.asp#index
Index Options
Just as stock options are defined as contracts that give the buyer the right
to buy or sell a stock at a stated price for a limited period of time, so do
cash-settled index options give buyers similar rights. However, the underlying
asset covered by index options is not shares in a company but rather an
underlying dollar value equal to the index level multiplied by $100. The amount
of cash received upon exercise or at expiration depends on the closing value of
the index in comparison to the strike price of the index option.
CBOE currently trades cash-settled index options on approximately 40 indexes.
Index options allow you to make investment decisions on a specific market
industry or on the market as a whole. Each index is unique and may cover a broad
array of underlying stock or represent a narrow sector of the market. There are
indexes which are American Style or European Style; Capitalization-weighted or
Price-weighted; Broad based or Narrow based. You should review the components
and contract specifications of each index carefully to decide which index best
fits your investment strategy.
Index Options
Specifications & Components
What that means is:
Suppose index XYX is trading at 158 and you buy
an index XYZ Sept 160 call for 3.00 ($300.00) and some time
later the index closes at 175.24. If you decide to exercise the call,
you receive cash in the amount of $100 times the difference in the index closing
price and the strike price: $100 x (175.24 - 160) = $1524.00. Your
profit would be $1524 -300 = $1224.00. If you had sold that call you
account would be debited that amount. The same with puts but in the
opposite direction.
However it is unlikely that you would want to
exercise the option since there may be time premium remaining that you would
lose. In other words with the index at 175.24 your 160 call might have a
bid of 16.00 ($1600.00). By exercising, instead of just selling the
call, you would lose $1600 - 1524.00 = $76.00.
As an option, particularly deep in the money options,
approach expiration the time premium disappears. In that case a
professional arbitrager, who pays nil in commissions, may find it profitable to
exercise the option should the index trade out of line with the
option.
If you sell index options you must have sufficient
cash in your account to cover a potential expiration. My broker requires
$100,000.00 in cash or securities. For this reason most (all?) option
sellers hedge their positions, by buying an partially offsetting
position.
Hope this helps.
Good luck and good trading,
Ray Raffurty
----- Original Message -----
<BLOCKQUOTE
>
<DIV
>From:
ketayun
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders
Sent: Thursday, May 29, 2003 5:21
PM
Subject: [RT] options
Would someone please explain...I was told that with
the oex, one can buy puts/calls...... but the option cannot be redeemed
per se because the underlying vehicle is an index. If this is so, what
precisely does the option represent in actual real value?What I
wanted to do was buy an option with July expiry and my question was can I
exercise that option any time between now and July expiration?Thanks a
lot.To
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