Commodity Options MarketsOptions MarketsOptionOptions marketsSlide 5Types of OptionsTypes of OptionsOption ComponentsComponents of Option PremiumIntrinsic ValueTime ValueTime valuePremium valuePut and call valuesPutCallHedgesOperating RealitiesOperating realitiesStandard strategiesEvaluation of Option HedgesCommissionBuy callSlide 24Buy putOptions Assignment 1Options assignment 1Options Assignment 2Selling optionsSlide 30Sell Cash / Long CallSlide 32Slide 33Sell Cash / Long Call EvaluationSell Cash/Long Call EvaluationPowerPoint PresentationSell Cash / Long Call ExampleSlide 38Slide 39Cattle feeder options hedgeOptions/futures comboDelta affects hedge effectivenessSlide 43When are options a good choice?OptionsYou should be able to evaluate payoffs from:Options Assignment 3Slide 48Commodity Options Commodity Options MarketsMarketsCommodity Options Commodity Options MarketsMarketsOptions MarketsOptions MarketsOptions MarketsOptions MarketsAre more complex than futures with Are more complex than futures with much more complicated terminology much more complicated terminology and strategiesand strategiesCommodity options allow you to Commodity options allow you to either have a short or long futures either have a short or long futures position at a particular futures price, position at a particular futures price, if you want it, or or provide a position if you want it, or or provide a position to the buyer if they want it. to the buyer if they want it.OptionOptionOptionOptionContract between two parties that Contract between two parties that conveys a conveys a rightright but not an but not an obligationobligation to buy or sell a specific to buy or sell a specific commodity futures contract at a commodity futures contract at a specific price within a specific time specific price within a specific time period for a premium.period for a premium.Pay premium if buy, receive if sell.Pay premium if buy, receive if sell.Options marketsOptions marketsOptions marketsOptions marketsTraded on major futures exchanges Traded on major futures exchanges as adjunct to most heavily traded as adjunct to most heavily traded futures contractsfutures contractsOptions were made legal again in Options were made legal again in mid-1980s after 50 years; prior mid-1980s after 50 years; prior history of “bucket shops” fleecing history of “bucket shops” fleecing customers led to their bancustomers led to their banOptions marketsOptions marketsOptions marketsOptions marketsOptions on cash products were not Options on cash products were not legal unless delivery was required; legal unless delivery was required; others had to be traded on an others had to be traded on an exchangeexchangeNow CFTC is beginning a trial Now CFTC is beginning a trial options program which allows some options program which allows some merchandisers to offer options merchandisers to offer options contracts on cash productscontracts on cash productsTypes of OptionsTypes of OptionsTypes of OptionsTypes of OptionsCALLCALLRight to Long PositionRight to Long PositionBuy (Long)Buy (Long) Sell (Short) Sell (Short)Right to AcquireRight to Acquire Obligation to Obligation to Long PositionLong Position Deliver Long Deliver LongTypes of OptionsTypes of Options Types of OptionsTypes of OptionsPUTPUTRight to Short PositionRight to Short PositionBuy (Long)Buy (Long) Sell (Short) Sell (Short)Right to AcquireRight to Acquire Obligation to Obligation to Deliver DeliverOption ComponentsOption ComponentsOption ComponentsOption ComponentsUnderlying Underlying Commodity Commodity FuturesFuturesStrike PriceStrike PriceExpiration DateExpiration DateSellerSellerBuyerBuyerPremiumPremiumComponents of Option PremiumComponents of Option PremiumComponents of Option PremiumComponents of Option PremiumIntrinsic ValueIntrinsic Value+ Time Value+ Time ValueTOTAL VALUETOTAL VALUEIntrinsic ValueIntrinsic ValueIntrinsic ValueIntrinsic ValueStrike Price minusStrike Price minuscurrent Futures Pricecurrent Futures PriceOnly “better” strike prices vs. Only “better” strike prices vs. futures have intrinsic value;futures have intrinsic value;Time ValueTime ValueTime ValueTime ValueVolatility of Underlying FuturesVolatility of Underlying FuturesHigher implies bigger time valueHigher implies bigger time valueInterest RatesInterest Ratespremiums vary directly with interest premiums vary directly with interest rates for calls; opposite for puts.rates for calls; opposite for puts.Time valueTime valueTime valueTime valueTime till expirationTime till expirationLonger means largerLonger means largerMore opportunity for futures to More opportunity for futures to movemoveDeclines faster as expiration nearsDeclines faster as expiration nearsPremium valuePremium valuePremium valuePremium valueIs an option fairly priced?Is an option fairly priced?Sophisticated computer programs Sophisticated computer programs are available, and used by are available, and used by professionalsprofessionalsBut which option makes the most But which option makes the most sense for you?-- a difficult issue.sense for you?-- a difficult issue.Put and call valuesPut and call valuesPut and call valuesPut and call valuesHigher when the option offers a Higher when the option offers a better deal than the current futures better deal than the current futures price levelprice levelPuts--futures lower than strike pricePuts--futures lower than strike priceCalls--futures higher than strikeCalls--futures higher than strikePutPutPutPutOut-of-the-moneyOut-of-the-moneyStrike Price < Futures PriceStrike Price < Futures PriceAt-the-moneyAt-the-moneyStrike Price = Futures PriceStrike Price = Futures PriceIn-the-moneyIn-the-moneyStrike Price > Futures PriceStrike Price > Futures PriceCallCallCallCallIn-the-moneyIn-the-moneyStrike Price < Futures PriceStrike Price < Futures PriceAt-the-moneyAt-the-moneyStrike Price = Futures PriceStrike Price = Futures PriceOut-of-the-moneyOut-of-the-moneyStrike Price > Futures PriceStrike Price > Futures PriceHedgesHedgesHedgesHedgesFutures HedgeFutures HedgeUsed to establish a price levelUsed to establish a price levelMust post marginMust post marginOptions HedgeOptions HedgeUsed to establish floor or ceiling price.Used to establish floor or ceiling price.No margin required for buyers.No margin required for buyers.Price insurance.Price insurance.Operating