30 years: Risk management & derivatives trading
In this video, Lindsey uses the knowledge of equity index options to complete a few exercises.
In this video, Lindsey uses the knowledge of equity index options to complete a few exercises.
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3 mins 59 secs
Equity index options exist as both options on futures (which settle into a position in the futures if exercised) and options on the underlying index (which cash settle). The FTSE index options cash settle, using the same settlement price, the exchange delivery settlement price, as the futures cash settle against.
Key learning objectives:
Apply your knowledge of equity index options to complete 5 exercises
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Buy 5,900 call: -160.5
Sell 5,950 call: +127.5
-160.5 + 127.5 = -33
Cost is 33 index points.
Individually, the two payoffs can be displayed as follows:
The combined payoff is known as a long call spread and can be displayed as follows:
Once the costs have been included:
Buy 5,950 put: -158.5
Sell 5,900 put: +129.5
Paying out 29 index points
The combined position is known as a long put spread and gives the following payoff before considering costs:
Once costs have been included, the payoff looks like the following:
Combining the two positions gives a flat payoff of 50 points, however, the position has cost 62 points resulting in a payoff of a flat -12 points regardless of the futures price.
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