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At the time of signing the agreement, spot price for crude oil is USD 44. 3 months’ time is USD 44. To lock in the selling price at USD 44. NYMEX Brent Crude Oil futures contracts. With each NYMEX Brent Crude Oil futures contract covering 1,000 barrels of crude oil, the oil extraction company will be required to short 100 futures contracts. The effect of putting in place the hedge should guarantee that the oil extraction company will be able to sell the 100,000 barrels of crude oil at USD 44.
Let’s see how this is achieved by looking at scenarios in which the price of crude oil makes a significant move either upwards or downwards by delivery date. By delivery date, the crude oil futures price will have converged with the crude oil spot price and will be equal to USD 39. As the short futures position was entered at USD 44. This amount is equivalent to selling 100,000 barrels of crude oil at USD 44. 100,000 barrels of crude oil for a higher net sales proceeds of USD 4,862,000. However, as the short futures position was entered at a lower price of USD 44.
With 100 contracts covering a total of 100,000 barrels of crude oil, the total loss from the short futures position is USD 462,000. Again, this is the same amount that would be received by selling 100,000 barrels of crude oil at USD 44. An alternative way of hedging against falling crude oil prices while still be able to benefit from a rise in crude oil price is to buy crude oil put options. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. Writing Puts to Purchase Stocks If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. Effect of Dividends on Option Pricing Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Bull Call Spread: An Alternative to the Covered Call As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative.
Dividend Capture using Covered Calls Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. Leverage using Calls, Not Margin Calls To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. Day Trading using Options Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. What is the Put Call Ratio and How to Use It Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.
Understanding Put-Call Parity Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Understanding the Greeks In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. Valuing Common Stock using Discounted Cash Flow Analysis Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose.
Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose. Poors 500, a capitalization weighted index of 500 actively traded large cap common stocks in the United States. The SPX index option is an european style option and may only be exercised on the last business day before expiration. P 500 index is poised to fall, then SPX put options should be purchased instead. Note that for simplicity’s sake, transaction costs have not been included in the calculations.
P 500 index and therefore trades at 815. 33 and correspondingly, the SPX is now trading at 938. With the SPX now significantly higher than the option strike price, your call option is now in the money. In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the SPX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires. In the example above, as the option sale is performed on expiration day, there is virtually no time value left.