Regarding options on futures contracts that cash settle, like 30 yr. T-bonds... Assume the Mar04 contract is at 110-00 Assume that I hold no other open positions in T-bonds If I SELL a Jan 112 Call and hold it to expiration which is on Dec 27, 2003 and the market on that day is at 113-00 and I am "assigned" What exactly is my financial risk in this situation?
Your undetermined financial risk is this. There is many possibilities that the stock may go down 5%, 10%, 50%, or 100%; or go up 5%, 10%, 50%, or 100% in the coming Monday, weeks, or months. And your fixed financial risk is that "they" always take money from you anyway.
If you sell a JAN call, my guess is it will expire in Jan (not Dec) Your risk will be the difference in points between strike price and market price, multiplied by point value. In this case : 112 - 113 * 1000 = -$1000 Of course you have other factors to include (received premium / interest) Hope this helps
ok, so here we are... I have sold a Jan 112 call and at the time of expiration the market is trading at 113-00... The ecstatic buyer finds him/herself a profit taker of $1000 (less premium,commission,fees) because their long call has expired that much into the money and their call has been automitically exercised for them by the Chicago Board of Trade. What does the Chicago Board of Trade do to me? Do they (via my broker) debit my account $1000?
Hi, in the case of T-Bonds, the options expire the month before the month which identifies the option. Eg., jan call/puts expire in december... feb call/puts expire in january
The CBOT will (via your broker) assign you a March 04 futures contract short from 112^00. Thus you will be in the hole for $1,000 plus commissions less whatever premium you received when you sold the 112 Call option. You can do what you wish with the futures position. Conventional wisdom would say it's a loser, so cut your losses. However, there are many strategies, involving the purchase or sale of additional options, by which one can turn such a losing trade into a breakeven or even a winning proposition. Joe Ross wrote an excellent book about the subject, Trading Optures and Futions (c) 1994 Trading Educators Ltd. I'd recommend that you educate yourself about option strategies and how to combine them with futures trading - before you get yourself into any more fine messes like this!
Thanks for the serious reply, Idoogye. Am i correct in thinking that if i entered a gtc order to go long a march future on a 112 -00 buy stop that the short call would then be "covered" should the market proceed to 113-00? Ie., I would not really need to implement a hedge strategy such as going long the future until the market closes near that 112-00 level?