DTXDow Jones Utility Average: $DUXDow Jones Internet Commerce: $ECMDrug Index: $RXS (PHLX)Drug Stock: DRG617
618
APPENDIX A: LISTED INDEX AND SECTOR OPTIONS
Euro 25 ADR Index: $EOREurope Sector Index: $XEX (PHLX)Gold Index: $GOXGold Bugs Index: $HUIGold and Silver: XAUHardware Index: $GHAHousing Index: $HGXInsurance Index: $KIX (KBW)Interest Rate Indices:Short-Term Interest Rates: IRX5-Year Treasury Note: FVX10-Year Treasury Note: TNX30-Year Treasury Bond: TYXInternet: $MOXInternet Index: $INXInvestment Manager Index: SMQ (SIG)Hong Kong: HKOInstitutional: XIIJapan: JPNMajor Market: XMIMorgan Stanley High Tech: MSHMultimedia Networking Index: $GIPNatural Gas: XNGNasdaq 100: NDXNasdaq 100 Mini-Index: $MNXNasdaq Biotech: $NBIOil Index: $OIXOil Service: $OSXOil Services: $MGOOil Stock: XOIOTC Prime Sector Index: $OTXRetail Stock Subindex: RLXRetail: $MVRRussell 2000: RUTRussell 3000 Value: $RAVRussell 3000 Growth: $RAGRussell 1000 Value: $RLVRussell Midcap: $RMCRussell 1000 Growth: $RLGRussell 3000 Index: $RUARussell 1000 Index: $RUI
APPENDIX A: LISTED INDEX AND SECTOR OPTIONS
619
Russell 2000 Value: $RUJRussell 2000 Growth: $RUORussell Midcap Value: $RMVS&P 100: OEX, CPOS&P 100 (OEX) European style: $XEOS&P 500: SPXSemiconductor: SOXSemiconductor Index: $GSMService Index: $GSVSmall Cap 600 Index: SMLSoftware: $GSOtheStreet.com Internet Sector: $DOTUtility Stock Subindex: UTYHOLDRS (HOLding company Depositary ReceiptS)Listed on the AMEXBiotech HOLDRS: BBHBroadband HOLDRS: BDHB2B Internet HOLDRS: BHHEurope 2001 HOLDRS: EKHInternet HOLDRS: HHHInternet Architecture HOLDRS: IAHInternet Infrastructure HOLDRS: IIHMarket 2000+ HOLDRS: MKHOil Service HOLDRS: OIHPharmaceutical HOLDRS: PPHRegional Bank HOLDRS: RKHRetail HOLDRS: RTHSemiconductor HOLDRS: SMHSoftware HOLDRS: SWHTelecom HOLDRS: TTHUtilities HOLDRS: UTHWireless HOLDRS: WMH
ETFs: A rather complete listing is usually available at www.amex.com. On the left-hand menu, click on ETFs. In the drop-down menu,select “All ETFs.” Not all of those that are listed have options, forsome ETFs trade by themselves.
Appendix B
Futures Options Termsand ExpirationsThe following data were accurate at the time of publishing, but expiration date definitions may change (contract sizes may change, too,but those are quite infrequent). If you want up-to-date information,either contact your futures broker, or visit the web site of the Institutefor Financial Markets (www.theifm.org) and subscribe to the “Futuresand Option Fact Book,” which is the most comprehensive information available on this subject.Underlying
$ / Point of Movement
Expiration Date
British Pound
$625 (150.00 –151.00)
Canadian Dollar
$1,000 (72.00 –73.00)
Cattle, Feeder
$500 (80.00–81.00)
Cattle, LiveCocoa
$400 (72.00–73.00)$10 (1,100–1,101)
Coffee
$375 (82.00–83.00)
Copper
$250 (87.00–88.00)
Corn
$50 (260–261)
CottonCrude OilCRB Index
$500 (80.00–81.00)$1,000 (16.00 –17.00)$500 (250.00–250.00)
Deutsche mark
$1,250 (58.00–59.00)
Second Friday before thirdWednesdaySecond Friday before thirdWednesdayLast Thursday that’s not aholidayFirst FridayFirst Friday of precedingmonthFirst Friday of precedingmonthFourth day preceding LBD*of preceding monthFriday preceding LBD ofpreceding month by ⭌ 2business daysThird business day of month(See a calendar)Second Friday of contractmonthSecond Friday before thirdWednesday(continues)
621
622
APPENDIX B: FUTURES OPTIONS TERMS AND EXPIRATIONS
Underlying
$ / Point of Movement
Expiration Date
Dollar Index
$1,000 (84.00–85.00)
Dow Jones
$10 (10,500–10,501)
Euro Currency
$1,250 (113.00–114.00)
Eurodollar
$2,500 (94.00–95.00)
Five-Year Note
$1,000 (102.00–103.00)
Gasoline (unleaded)Gold
$420 (48.00–49.00)$100 (381.00–382.00)
Heating OilHogs, LiveJapanese Yen
$420 (46.00– 47.00)$400 (45.00– 46.00)$1,250 (97.00–98.00)
Lumber
$160 (326.00–327.00)
Muni BondsNasdaq-100
$1,000 (90.00–91.00)$100 (1400.00–1401.00)
Nikkei StockAverageOrange Juice
$500 (201.00 –202.00)
Platinum
$50 (388.00–389.00)
Pork BelliesSilver (COMEX)
$400 (54.00–55.00)$50 (525.00–526.00)
Soybeans
$50 (653–654)
Soybean Meal
$100 (187.00–188.00)
Soybean Oil
$600 (25.00–26.00)
Second Friday before thirdWednesdayThird Friday of contractmonthSecond Friday before thirdWednesdaySecond London business daybefore third WednesdayFriday preceding last day ofpreceding month by atleast 2 business days(See a calendar)Second Friday of precedingmonth(See a calendar)First FridaySecond Friday before thirdWednesdayLast Friday of precedingmonthEighth-to-last business dayThird Friday of contractmonthThird Friday (second Fridayin Mar, Jun, Sep, Dec)First Friday of precedingmonthSecond Friday of precedingmonth(See a calendar)Second Friday of precedingmonthFriday preceding LBD ofpreceding month by ⭌ 2business daysFriday preceding LBD ofpreceding month by ⭌ 2business daysFriday preceding LBD ofpreceding month by ⭌ 2business days
$150 (100.00 –101.00)
APPENDIX B: FUTURES OPTIONS TERMS AND EXPIRATIONS
623
Underlying
$ / Point of Movement
Expiration Date
S&P 500 IndexSugar (#11)
$500 (443.00 – 444.00)$1,120 (11.00 –12.00)
Swiss Franc
$1,250 (69.00–70.00)
T-BillsT-Bonds
$2,500 (95.00 –96.00)$1,000 (105.00–106.00)
T-NotesTen-Year Note
Same as T-Bonds$1,000 (102–100 to103–100)
Wheat
$50 (314–315)
Third FridaySecond Friday of precedingmonth (Dec: secondFriday of Dec)Second Friday before thirdWednesday(See a calendar)Friday preceding LBD ofpreceding month by ⭌ 2business daysSame as T-BondsFriday preceding last day ofpreceding month by atleast 2 business daysFriday preceding LBD ofpreceding month by ⭌ 2business days
*LBD: last business day.Note: If no month is specified, option contract month is assumed; “precedingmonth” refers to month preceding option contract month.
Appendix C
Option ModelsBlack–Scholes ModelValue = pN(d1) – se–rtN(D2)d1 =
where
( ) (
)
ln p s + r + v 2 2 tv t
d2 = d1 − v tThe variables are:pstrlnN(d)v
stock pricestriking pricetime remaining, in yearscurrent risk-free interest rate,usually the 90-day T-bill ratenatural logarithmnormal density functionvolatility (annual standard deviation)
The normal density function can be approximated with the following polynomial. First, calculate the values for x, y, and z. To find N (σ):z = 0.3989423e–σ/2y = 1 ⁄(1 + 0.2316419 σ )x = 1 – z(1.330274y5 – 1.821256y4 + 1.781478y3 –0.356538y2 + 0.3193815y)Then N(σ) = x if σ > 0, or N(σ) = 1 – x if σ < 0625
626
APPENDIX C: OPTION MODELS
The Greeks can be computed by taking partial derivatives of themodel’s formula. For example,Delta = N(d1)e− x 2
Gamma =
where
pv t
−tx = ln p  s 1 + r  
(
(2π )
)
(v t ) + v t 2
Binomial ModelBelieved by some to be more accurate than Black–Scholes because itgives the modeler the ability to define his own distribution of prices,the binomial model involves more calculations than the Black–Scholes model does. However, with today’s faster computers, that’sless of a consideration than it once was. The model is also known asthe Cox–Ross–Rubinstein (C-R-R) binomial model.To begin, construct a lattice as shown in Figure C.1. The left sideof the lattice represents the current stock price. The defined probabilities are then used to determine the stock prices all along the lattice.The width of the lattice represents the time periods that a trader mightbe willing to consider from the current time until expiration (in actualpractice, up to 50 time periods may be used to value an option).In the example lattice shown here, it is assumed that the stockcan make only two movements: either up 20 percent or down 20percent for each time period. Furthermore, assume that we are onlyonsidering three time periods. In this simple example, the stock mustbe either at 172.8, 115.2, 76.8, or 51.2 after three time periods.Note that each up node is 1.2 times the previous node, while eachdown node is 0.8 times the previous node.Once this process is completed, the intrinsic value of an option atthe right-hand side of the lattice is easily determined. For example, if
APPENDIX C: OPTION MODELS
627
we were trying to evaluate a call with striking price 100 that expiredafter three periods, then we can see that the options would be worththe following at expiration:Stock Price172.8115.276.851.2
Option Value atExpiration72.815.200
Now, we’d like to also know with what probability these movesoccur. The C-R-R formula gives us a formula to determine this:p = (R – d) / (u – d)where p = probability of an up moveR = ertr = risk-free interest ratet = years remaining until expirationu = size of an up moved = size of a down moveFigure C.1BINOMIAL MODEL LATTICE
628
APPENDIX C: OPTION MODELS
In our simple example, the size of an up move, u, is 1.2 (a 20percent increase), while the size of a down move is 0.8 (a 20 percentdecrease). Furthermore, for simplicity’s sake, assume R = 1.04.Then we can calculate:p = (1.04 – 0.8) / (1.2 – 0.8) = 0.6Thus, p = 0.60, so there is a 60 percent chance that the stockwill rise during the time period, and, of course, that means that thereis a 40 percent chance that it will decline. This is something like thelognormal distribution in that there is a larger chance that the stockwill rise than that it will decline.All of this information is summarized in Figure C.1. The stockprices at each node are shown, as well as the probability of each ofthem occuring—the number in parentheses. Note that a node thathas two inputs (one from above and one from below) has a probability equal to the sum of the probabilities from the previous node.Finally, we can use this information to determine the theoreticalvalue of a call today at the initial node. We merely calculate theintrinsic value at expiration times the probability of being at thatnode, for each node, and sum them. In this example, the call value(C) isC = 0.216 (172.80 – 100) + 0.432 (115.20 – 100)+ 0.288 (0) + 0.064 (0)= 15.72 + 6.57 + 0 + 0 = 22.29Thus, the theoretical value of a three-period call with striking price100, with the stock at 100, under these assumptions, is 22.29.In general, the C-R-R model gives us the following formula fordetermining the value of a call at any node. All that is required is toknow the call value at the succeeding node. Thus, in actual application, we evaluate the lattice from right to left in order to determinethe value of the call at the initial node.The way we do this is to use the C-R-R formula to determine thetheoretical call value, C:C=
(
)
pCup + 1 − p CdownR
APPENDIX C: OPTION MODELS
where
629
p = probability of an up moveR = ertCup = value of the call if the underlying moves up by uCdown = value of the call if the underlying moves down by d
If we are evaluating the tree from right to left, we always know Cupand Cdown, so this is a quick computation.To summarize, then, we first establish the lattice from left toright, using the assumptions about stock price movement. Then, wework from right to left, using the formula just given to arrive at a theoretical value for the call itself.For further information on the use of the C-R-R model, youshould read Options Markets, by John C. Cox and Mark Rubinstein(Prentice-Hall, 1985).
Index
ADM, 232–233Advance-decline line, 374–377Advanced Fibrecom (AFCI), 169–170Advanced Micro Devices (AMD), 35,249–250Agricultural options trading, 11AIQ, 581Alliant Technology (ATK), 315Altria, 172Amax Corp., 71America Online (AOL), 315American Cyanamid (ACY), 203–205American depository receipts (ADRs),236American Express (AXP), 315American Home Products, 203, 205American Medical Holdings (AMI),556–558American Stock Exchange (AMEX),9–10, 27, 102, 308, 385, 414,465, 617–619American-style options:characteristics of, generally, 23European options distinguishedfrom, 381–382, 384, 387Amgen, 26Analysis, see Fundamental analysis;Technical analysisArbitrage (arb):defined, 120diagonal spread, 88–89index, 120–124option volume and, 194–197postexpiration, 157
put-call ratio, 297See also Index arbitrageArbitrageur(s):exercises by, 22–24implied volatility, 283index, 122–124, 128–129,130–131, 143–145intermarket spread, 381, 384, 387put-call ratio, 284–285risk, 144–145trading with, 148–149Arms, Richard, 377Arms Index, 342–343, 348, 377ASA Limited, 603–604Assignments:European-style options, 385implications of, 15–19mechanics of, 19–22partial tender offers, 110–111volatility skew and, 539, 543–547At-the-money options:buying, 51delta of, 39implied volatility, 478index futures, 136as insurance, 164put-call ratio, 303ratio spreads, 93seasonal tendencies, 429spreads and, 90volatility changes, 489, 506volatility skew, 521, 528, 541, 545volume and, 227AT&T, 9, 88, 161, 164Atlantic Richfield, 9
631
632
INDEX
Automatic execution system, 570–571Avon, 8Back-end tender, 605Backspread:call, 96–98, 530–531characteristics of, generally, 96long straddle and, 97–98, 478–479put, 98–99, 525–526, 530–531volatility and, 272, 471, 478–479,500, 511, 513–514, 532–536,540, 568Banker’s Trust, 452Banking (BKX) sector, 308, 310Bankruptcy, 566Banksouth (BKSO), 244–245Barbarians at theGate (Burrough/Helyar), 600Barclays Global Investors, 10, 308,405Barings Bank, 123–124, 453Barron’s, 147Bear/bearish market, 36–37, 54, 62,70, 76, 177, 223, 256–257,267, 276, 284, 289, 297,302, 314, 330, 407, 436Bear spread, 70, 81–83, 90, 99, 525,547Beat the Market (Thorp/Kassouf),585Bell Atlantic, 14Bell curve, 521–522Bell Telephone Laboratories, 588Bendix Corporation, 600Beta, 160, 163Bethlehem Steel (BS), 231–232Better Software People, The, 580Bid-ask spread, 40, 227, 309, 407,467Binomial model, 626–629Biotech stock, 33Black-Scholes option pricing model,170–171, 523, 625–626Bloomberg terminal, 578–579Blow out, 20
Boeing (BA), 315Boesky, Ivan, 601–602Bond market, influential factors, 138,147, 420Bonneville, 355Break-even point, 94, 462, 467, 470,473, 477, 548, 560–561Breakout, 234, 341British pound (BP), 334–335, 339,621Broker, functions of, 230Brokers/brokerage, 572–576,584–585. See also specifictypes of brokersBrunswick, 9Bull/bullish market, 78, 97, 112–114,257–259, 289, 297, 313, 327,375, 417, 615Bull spread, 77–81, 83, 99, 227, 525,575Butterfly spread, 99–100Buy-and-hold strategy, 584Buyers, trading procedures, 12–14Buy point, 434–439Buy signal:intraday signals, 371–372moving averages, 341–344put-call ratio, 299, 301–304, 306,313–314, 318, 321, 322,324–327, 330–332, 334–338,345seasonal tendencies, 432–433TICKI day trading , 359–361volatility and, 264–265Buy stop, 233Caesar’s World, 200–201Calendar spread, 85–88, 471,479–483, 511–513, 555–558,562–563Call backspread, 96–98, 530–531Call calendar spread, 480Call option, generally:break-even point, see Break-evenpoint
INDEXbuying, 55–57defined, 3delta of, 39exercise and assignment of, 15exercising, 8intermarket spread, 379–380in-the-money options, 15–16in over-the-counter market, 7price influences, 36striking price, 17Call ratio spread, 92–94, 464–465,525–527Call ratio write, 501Canadian dollar, 621Cap Cities ABC, 223Capital gains, 118, 388Cash option, exercise of, 22–24Casino gambling, 587–588Cattle options, 322. See also LivecattleCBOE Futures Exchange (CFE),177–178Certificate of deposit (CD), 117Chandelier stops, 596Chevron-Texaco (CVX), 316Chicago Board of Trade (CBOT), 7–8,30Chicago Board Options Exchange(CBOE):equity-only put-call ratio, 284functions of, generally, 27, 102historical perspective, 6–9implied volatility, 354listed options, 617–619OEX, see OEXput-call ratio, 287VIX, 281–282Volatility Index (VXO), 177,263–268, 278–280, 282Chicago Mercantile Exchange (Merc),9, 30, 337, 358Chipcom (CHPM), 207–210Chiron (CHIR), 604, 607–609Cigna (CI), 316Cisco (CSCO), 169–171, 316
633
Cities Service Company, 598–600Citigroup (C), 315Closing price, 343–344, 465, 577Closing stop, 224–225, 230, 596Closing trade, 12Coca-Cola, 43–44, 316Cocoa, 339, 340, 621Coffee, 28, 324, 326–327, 339, 340,621Collar, 69, 81, 158–159, 168–174Collateral, 63–64, 73, 80, 106–107,533, 541, 546, 549, 600Combination:naked, 461–462, 466–467, 482purchases, 58–59sale of, 73–77short, 74short naked, 506trading volume, 193volatility and, 482Commission, 6–7, 17, 30–31, 118,467, 573–575Commodities:implied volatility and, 257options volume and, 236reverse volatility skew, 524–525striking price, 3types of, 24–25volatility and, 257See also specific types ofcommoditiesCommodity Research Bureau Index, 2Common stock, 118, 128, 237Compaq, 189Composite graphs, 390Condor, 99Conoco, 598Contrarians, 265, 284–285, 288,298Conversion arbitrage, 194Copper, 322, 340, 621Corn:futures, volatility skew, 528–529options, 25, 28, 236, 257, 322,340, 378, 527, 612, 621
634
INDEX
Corporate news events, impact of,187, 189, 222–223, 233, 236,238–241, 457, 460Cotton:futures, 113, 115options, 327, 330, 621Covered call writing:characteristics of, 60–62volatility increases and, 258–262Covered straddle writing, 76–77Covering, 20–21Cox-Ross-Rubinstein (C-R-R) binomialmodel, 626–629CRB index, 322, 429, 621Credit spread, 80, 83–85, 90, 99CRX Index, 424Currency futures, 86–88Currency options, put-call ratio,334–338Customer, firm distinguished from,13Daily oscillator value, 366Daily Volume Alert, 226–227Data Broadcasting Corporation,577–578Data vendors:costs, 576–577data connection, 577–580function of, 576–580Dayton Hudson, 21Day trading, 141, 590Day-trading vehicles:intraday market-reversal corollary,363–366overview of, 353–355See also TICKI Indicator, daytradingDealer, functions of, 6–7Debits:bear spread and, 81bull spread and, 80cash–based options, 23limit moves and, 115
Deciles, volatility measure, 458–459,468, 470, 477Decimalization, 376–377Deflation, 420Delayed quotes, 577Dell Computer (DELL), 316Delta:buying options, 51characteristics of, 37–38, 484computation of, 626defined, 445influential factors, 39–42neutral trading, see Delta neutraltradingvolatility and, 486–491Delta neutral trading:characteristics of, 445–454, 511,513, 515, 533, 536, 547hedge, 585implied volatility, 474–475trading volatility, 506–511Den of Thieves (Stewart), 600Depository trusts, 10Deutsche mark, 339, 621Diagonal spread, 88–89Diamonds (DIA), 304, 308Discount, inter