Commodity Futures and Options
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1 Commodity Futures and Options ACE 428 Fall 2010 Dr. Mindy Mallory Mindy L. Mallory
2 Synthetic Positions
3 Synthetic positions You can create synthetic futures positions with options The combined payoff of the options is the same as the payoff of an outright futures position 3
4 Synthetic positions Synthetic long futures Long call + short put (same strike) Synthetic short futures Long put + short call (same strike) 4
5 Synthetic positions: Example synthetic long wheat Create a long position on Dec wheat futures Futures price = $5.38/bu Dec call (go long) K =$5.20/bu Prem = $0.60/bu Dec put (go short) K = $5.20/bu Prem = $0.17/bu 5
6 Synthetic positions: Example synthetic long wheat If underlying futures price goes above $5.20/bu Exercise the call and gain the difference between F and K Put you sold is not exercised You gain if F > $5.20/bu 6
7 Synthetic positions: Example synthetic long wheat If underlying futures price goes below $5.20/bu You don t exercise the call Put you sold is exercised and you lose difference between K and F You lose if if F < $5.20/bu 7
8 Synthetic positions: Example synthetic long wheat The payoff diagram: Long call 8
9 Synthetic positions: Example synthetic long wheat The payoff diagram: Short put 9
10 Synthetic positions: Example synthetic long wheat The payoff diagram: Net 10
11 Synthetic positions: Example synthetic long wheat The payoff diagram: Net Net looks like a long futures bought at F = $5.63 $5.63 = $
12 Synthetic positions: Example synthetic long wheat The payoff diagram: K = $5.20 Cost of the position = ($0.17 $0.60) = $
13 Synthetic positions: Example synthetic long wheat The payoff diagram: Synthetic futures at $5.63 K = $5.20 Cost of the position = ($0.17 $0.60) = $
14 Synthetic positions: Example synthetic long wheat Synthetic futures at $ Strike (K) Put prem (P) Call prem (C) = Synthetic futures price (Fs) = $
15 Synthetic positions: Example synthetic long wheat Synthetic futures at $ Strike (K) Put prem (P) Call prem (C) = Synthetic futures price (Fs) = $5.63 You make money when Ft > Fs Current futures price > Synthetic futures price 15
16 Synthetic positions: Long In other words You make money on the synthetic long when: Ft > K P+ C or P C > K F t 16
17 Synthetic positions: Example synthetic short wheat So how do you create a synthetic short? Sell call (go short) Buy put (go long) 17
18 Synthetic positions: Example synthetic short wheat Example futures price = $5.38/bu Dec call (go short) K =$5.20/bu Prem = $0.60/bu Dec put (go long) K = $5.20/bu Prem = $0.17/bu 18
19 Synthetic positions: Example synthetic short wheat If the underlying futures price goes above $5.20/bu Don t exercise your put Call is exercised against you, lose F K If the underlying futures price goes below $5.20/bu Exercise your put: gain F K call is not exercised against you You gain if the price goes down and lose if the price goes up (relative to $5.20/bu) 19
20 Synthetic positions: Example synthetic short wheat Does this look like a short position? 20
21 Synthetic positions: Example synthetic short wheat Does this look like a short position? 21
22 Synthetic positions: Example synthetic short wheat Does this look like a short position? 22
23 Synthetic positions: Example synthetic short wheat Does this look like a short position? 23
24 Synthetic positions: Example synthetic short wheat Does this look like a short position? Yes, but this time there is revenue from building the position Extra revenue of $0.43 = from selling the call and buying the put Taking this into account its like going short in the futures market at $5.63 Synthetic futures price = $5.63/bu 24
25 Synthetic positions: Example synthetic short wheat You make money in the synthetic short position as long as: futures price < Strike put premium + call premium 25
26 Synthetic positions: Short In other words You make money on the synthetic Short when: Ft < K P+ C or P C < K F t 26
27 Synthetic positions: futures and options You can also combine futures and options contracts to create synthetic positions in both futures and options Examples: Long call + short put long futures Long futures + short call short put Long futures + long put long call 27
28 Pure Speculative Option Strategies
29 Pure Speculative Option Strategies Bull spread: you think prices are rising, but you are only willing to bet within a range How do you get this position?
30 Pure Speculative Option Strategies Bull spread: Two ways With two calls, or With two puts
31 Pure Speculative Option Strategies Bull spread: If you are bullish, you think prices will rise Buy an option with a low strike Sell an option with a higher price
32 Pure Speculative Option Strategies Example: Bull spread with calls Buy Call Strike = $3.00 Premium = $0.25 Sell Call Strike = $4.00 Premium = $0.05
33 Pure Speculative Option Strategies Example: Bull spread with calls Buy Call Strike = $3.00 Premium = $0.25 Sell Call Strike = $4.00 Premium = $0.05 Easy to make with excel, but this is fair game on an exam too
34 Pure Speculative Option Strategies Example: Bull spread with calls Buy Call Strike = $3.00 Premium = $0.25 Sell Call Strike = $4.00 Premium = $0.05
35 Pure Speculative Option Strategies Example: Bull spread with calls Buy Call Strike = $3.00 Premium = $0.25 Sell Call Strike = $4.00 Premium = $0.05 Easy to make with excel, but this is fair game on an exam too
36 Pure Speculative Option Strategies Example: Bear spread with puts Buy Put Strike = $9.00 Premium = $0.05 Sell Put Strike = $10.50 Premium = $0.25
37 Pure Speculative Option Strategies Example: Bear spread with puts Sell Put Strike = $9.00 Premium = $0.05 Buy Call Strike = $10.50 Premium = $0.25
38 Pure Speculative Option Strategies Example: Bear spread with puts Sell Put Strike = $9.00 Premium = $0.05 Buy Call Strike = $10.50 Premium = $0.25
39 Pure Speculative Option Strategies Example: Bear spread with puts Sell Put Strike = $9.00 Premium = $0.05 Buy Call Strike = $10.50 Premium = $0.25
40 More Option Strategies Butterfly spread 40
41 More Option Strategies Butterfly spread Buy option with a low strike Buy option with a high strike Sell 2 options with a strike in between (Same expiration of all three) Can be made with either puts or calls (all four options puts or all four options calls) Use this strategy if you think the price of the underlying will stay about the same You make a profit if the price doesn t move much Incur small loss if price makes a large move in either direction 41
42 More Option Strategies Butterfly spread If you buy/sell the options with symmetric strikes: The legs of the position will be the same: K = K a lo w middle K = K + a high middle 42
43 More Option Strategies Butterfly spread Otherwise, they will be uneven Klo w = Kmiddle 200 K high = K middle 43
44 More Option Strategies Butterfly spread Otherwise, they will be uneven Klo w = Kmiddle 150 K high = K middle 44
45 More Option Strategies Butterfly spread Buy option with a low strike Buy option with a high strike Sell 2 options with a strike in between (Same expiration of all three) Can be made with either puts or calls 45
46 More Option Strategies Butterfly spread: Example Buy Put: K = $960, Prem = $
47 More Option Strategies Butterfly spread: Example Buy Put: K = $960, Prem = $5.40 Buy Put: K = $1,160 Prem = $
48 More Option Strategies Butterfly spread: Example Buy Put: K = $960, Prem = $5.40 Buy Put: K = $1,160 Prem = $68.00 Sell 2 Puts: K = $1,060 Prem = $
49 More Option Strategies Butterfly spread: Example Buy Put: K = $960, Prem = $5.40 Buy Put: K = $1,160 Prem = $68.00 Sell 2 Puts: K = $1,060 Prem = $
50 More Option Strategies Straddle Buy a call and put with the same expiration and strike Use this strategy if you anticipate large price moves 50
51 More Option Strategies Straddle: Example Buy a call with K = $1,060 and Prem = $70 51
52 More Option Strategies Straddle: Example Buy a call with K = $1,060 and Prem = $70 Buy a put with K = $1,060 and Prem = $68 52
53 More Option Strategies Straddle: Example Buy a call with K = $1,060 and Prem = $70 Buy a put with K = $1,060 and Prem = $68 53
54 More Option Strategies Sell a Straddle Sell a call and put with the same expiration and strike Risky! You think prices are very stable Unlimited losses! 54
55 More Option Strategies Sell a Straddle: Example Sell a call with K = $1,060 and Prem = $70 55
56 More Option Strategies Sell a Straddle: Example Sell a call with K = $1,060 and Prem = $70 Sell a put with K = $1,060 and Prem = $68 56
57 More Option Strategies Sell a Straddle: Straddle: Example Sell a call with K = $1,060 and Prem = $70 Sell a put with K = $1,060 and Prem = $68 57
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