Conference nyoss1::market_investing

    
    	Re: .0
    
    	Yes, you have the basics correct.  An "option" is the right, but
    not requirement, to buy or sell something at a specific price at a
    future date.  A "future" (sometimes called "futures contract" <- note
    the last word) is an agreement that you _will_ buy or sell something at
    a specific price at a future date.
    
    							-craig

    A futures contract is the obligation to buy or deliver a specified
    quantity of a commodity at a specific date in the future.  In the case
    of Pork Bellies, the contract size is 40,000 pounds and the closing
    price (9/25) of the currently nearby contract (Feb93) is 39.22 cents.
    
    Small speculators (that's us) have absolutely no intention of taking or
    making delivery.  As long as you offset your position prior to the
    delivery period (i.e., Feb93), nobody is going to dump 40Kpounds of
    Pork in your driveway.  (That's an urban legend, with no basis in fact)
    
    For a deposit (called "margin") of $1300 you can trade Pork Bellies.
    Corn needs only $600, the amount varies with the contract.  Last week
    Feb bellies varied from a high of 41.05 to a low of 38.50.  If you had
    sold the high and bought the low, you would have profited $1020, or
    lost the same amount had you done the opposite.  That's why you have
    margin -- your broker taketh away your losses and giveth you your
    winnings on a daily basis.  As long as you have more than $1300 on
    deposit, you're OK (for bellies).  If your account drops below $1300
    you'll get a margin call and have to make up the amount or they'll close
    out your contract for you, deducting your losses from your margin; you
    keep the rest.  (Margin is not a "payment", merely a deposit to ensure
    you have funds available to cover losses).
    
    Note you can sell just as easily as you can buy.  You DO need to be
    sure to offset your position before delivery, else your broker will get
    mighty upset.  They'll call you a week ahead of time, just in case
    you forgot.  Believe me, you won't forget.
    
      John

    
    you can also buy options on futures contracts

!    A futures contract is the obligation to buy or deliver a specified
!    quantity of a commodity at a specific date in the future.  In the case
!    of Pork Bellies, the contract size is 40,000 pounds and the closing
!    price (9/25) of the currently nearby contract (Feb93) is 39.22 cents.
!    
!    Small speculators (that's us) have absolutely no intention of taking or
!    making delivery.  As long as you offset your position prior to the
!    delivery period (i.e., Feb93), nobody is going to dump 40Kpounds of
!    Pork in your driveway.  (That's an urban legend, with no basis in fact)
!    
!    For a deposit (called "margin") of $1300 you can trade Pork Bellies.
!    Corn needs only $600, the amount varies with the contract.  Last week
!    Feb bellies varied from a high of 41.05 to a low of 38.50.  If you had
!    sold the high and bought the low, you would have profited $1020, or
!    lost the same amount had you done the opposite.  That's why you have
!    margin -- your broker taketh away your losses and giveth you your
!    winnings on a daily basis.  As long as you have more than $1300 on
!    deposit, you're OK (for bellies).  If your account drops below $1300
!    you'll get a margin call and have to make up the amount or they'll close
!    out your contract for you, deducting your losses from your margin; you
!    keep the rest.  (Margin is not a "payment", merely a deposit to ensure
!    you have funds available to cover losses).

     Ok, lets see if I have this straight on the futures contract I 
agree to purchase 40k of pork for example but how much does this 
contract cost me? 40,000 * 39.22 or $15,688.00 and if this is the case 
were does the $1300 come into play? is the other 14,300 being lent to 
me by the broker and if I actually take delivery of 40,000 pound 
of pork(I see quite a few sausages in my future 8-) ) do I need to come 
up with the other $14,000?

     My next question is who actually writes these contacts? Big 
Agri-business companies, farmers or is it the brokerage houses and there 
isn't actually anything behind them unless someone actually takes delivery?
Then they need to scramble around for suppliers.

!    Note you can sell just as easily as you can buy.  You DO need to be
!    sure to offset your position before delivery, else your broker will get
!    mighty upset.  They'll call you a week ahead of time, just in case
!    you forgot.  Believe me, you won't forget.
!    
!      John

> agree to purchase 40k of pork for example but how much does this 
> contract cost me? 40,000 * 39.22 or $15,688.00 and if this is the case 
> were does the $1300 come into play?
    
    It doesn't cost you anything.
    
    The "agreement" applies to the future.  If you buy today and sell
    tomorrow you have offset your position and no longer have any obligation.
    This is what happens all the time.  No way are you going to hold your
    position into delivery.  Nor are you being "lent" any money.  Your
    $1300 is ALL IT TAKES, as long as the market doesn't move against you,
    in which case you need enough to cover your losses.  That $1300 is there 
    just to be sure you can come up with cash to cover losses.  There is 
    no other money on, over, around or under the table.
    
>     My next question is who actually writes these contacts?
    
    Anybody!  YOU CAN.  As long as you offset your position, i.e., buy back
    your contract, you will not be under any obligation to make delivery.
    That's what everybody does.  The floor crowd spends all day buying and
    selling, selling and buying, and most of them go home flat, no position.
    Occasionally Hormel comes in and buys 100 contracts, taking delivery in
    February.  Occasionally hog ranchers sell a few 10-lots.  It evens out.
    
    Here's a typical futures brokerage statement resulting from, say,
    buying at the open last Monday and selling at the close last Friday.
    
    		CURRENT ACCOUNT BALANCE -- SEGREGATED FUNDS  $ 1,300.00
    
    			PURCHASE & SALE
    
    09/14/92  B  1  PB G		 40.10
    09/18/92   S 1  PB G		 40.65
    
    				total	220.00
    				comm	 35.00
    				 fee	  0.16
    
    NET PROFIT OR LOSS FROM TRADES			     $   184.84
    
    ACCOUNT TOTAL					     $ 1,484.84

Greetings,

        A few years ago, I had some mild successes trading currency options
with a broker.  This time I'm going it alone.  I've been having fun following
the Deutchmark/Dollar duel as much as the Presidential campaign.

        I've read a bit on straddles and strangles (sounds unpleasant), but am
not clear if these are strategies practical for the real world.  As far as
straddles go,  I've done a few calculations, and don't see how buying puts and
calls at the same strike price could make any money.  There is net profit
before commission, but a loss after commission is paid.

        Does anyone have any preferred strategies?  That is, other than
guessing right every time.


                                                        Fred

    Straddling options:
    
    Example, DEC on 4/9/92, was trading at about 55.  April 55 put and call
    options, which expired on 4/18/92, were both priced at about $2 each.
    The next day Digital announces earnings, and the stock drops to 47ish.
    The April 55 put goes to 8 1/2, the April 55 call becomes worthless.
    SO, if you straddled both, it cost you $4 plus commissions (negligible,
    or you're using the wrong broker), but you sold for $8 1/2, or a gain
    of about 100%.  kb

    I offer one piece of advice:  never sell a naked option.  If you want
    to write an option, write a spread.  If you think (as I do) that pork
    bellies will go down, one choice is to write say a 40 call.  If you do
    that, buy a 42 or 44 call to limit your losses.  I got burned real bad
    one time I didn't do that.  It can happen to you.
    
      John

      RE: .8
      
      John --
      
      Could  you  work out some $ examples based on (1) things going the
      way you think vs. (2) if they dont go that way?  It might help  to
      enlighten the "option-ignorant" among us.

          Charlie

re: .7
        I'm not sure that "futures (are the) same as stock options".  For a
    rise or drop in currency, the Deutche Mark for instance, the puts and
    calls do not increase/decrease in equal amounts.  I guess in theory
    they are supposed to, but my research has showed that this is not the
    case.  I imagine this has to do with the fact that on a given day, you
    might see 2 or 3 times as many puts as calls being sold, based on the
    expectation of the direction the currency is going in.  Then again, I
    imagine "regular" (stock) options are probably weighted in the same
    way.

            Thanks for your input though.  Perhaps I haven't tracked puts/calls
    over a long enough interval to prove or dissprove that straddles work.  
    I'll do some more research, and post the results in here.

re: .8

        John, I don't know if I'm misunderstanding you, but I'm not talking
    about selling calls or puts, just buying them.  I have been singed too!

        As far as going naked, I guess I'm a bit of an exhibitionist.  My
    own strategy will probably be to follow the market trend on a given
    day, buying puts or calls with appropriate stop orders in place as
    safety nets.   I know it's not terribly elegant or scientific, and am
    open to better (i.e. more profitable and less risky) ideas.


                                                Fred

    re: (mine!)
    
    OK, OK, so I never posted my "results" in here.  Sue me!
    
    Seriously, I did discover that options strategies are varied and
    complex. I have been just trading standard call/puts on the D-mark
    and S&P500 with mixed results (the large print giveth, and the
    small print taketh away).  Right now, I'm about even.
    
    I'm basically into "day trading".  My broker is advising me that for
    this type of trading, it makes more sense to trade the futures rather
    than the options.  They say that you get a greater fluctuation per
    unit movement.  I have not researched this myself, and need to do
    some checking.  Does anyone have any input on this?
    
    
    
    						Fred

>    I'm basically into "day trading".  My broker is advising me that for
>    this type of trading, it makes more sense to trade the futures rather
>    than the options.  They say that you get a greater fluctuation per
>    unit movement.  I have not researched this myself, and need to do
>    some checking.  Does anyone have any input on this?
    
    Your broker is 100% correct.  Bigger movement, also tighter bid/ask
    spread.  Sometimes lower commissions.  Of course the margin for S&P
    futures is pretty big, so there's an advantage to trading options.
    
      John

    John,  thanks for your reply and the mail.
    
    My initial concern about buying the futures themselves was around what
    I perceived as the dangerous, unlimited risk involved.  Options are
    obviously so much safer.  However, I seem to be paying quite dearly
    for that safety and lack of volatility.
    
    I'm not sure what you mean about margins on futures being a
    disadvantage.  I'm typically buying options in the $1,000-$1,500 price
    range.  Aren't  the margins for future in the ~$600 price range?   If
    so, then it seems one needs less intial capital, not more.  Of course,
    this is assuming one does not get hit with a margin-call-from-hell. 
    
    							Fred

>    I'm not sure what you mean about margins on futures being a
>    disadvantage.  I'm typically buying options in the $1,000-$1,500 price
>    range.  Aren't  the margins for future in the ~$600 price range?   If
    
    Futures margins vary widely depending on the underlying instrument.
    Margin (this month) for a DM contract is $2700, CMX Gold $1065,
    Pork Bellies $1350, Wheat $675 and the S&P futures a hefty $15,000.
    
    Depending on your broker you might be able to day-trade on half margin.
    
    You should not let the "unlimited risk" cow you, especially if you are
    daytrading.  The stories of being on the wrong side of a 9-day limit
    move are way overblown; the sort of thing that happens to one volatile
    contract once a decade.  For example, when oil went to $40/bbl during
    the Kuwait invasion there was never a lock-limit-day going either way.
    Any day you could have gotten out, had you been on the wrong side of
    a move.  It would have cost you in slippage (trade way beyond stop) but
    that happens all the time.  Of course, it's all a matter of taste.
    
      John

re: -.1

John, you're right, the day trading margins are much lower.  Jack
Carl Futures will allow it on the S&P500 for $5K.  It's less for the
currencies.

I did a few preliminary calculations and see what you mean; even
deep-in-the-money options do not generate as much of a "delta" as the index
itself.  I'm glad the broker kept ragging on me!  

I'm still wondering about something.  Since the S&P Index fluctuates with
more volatility, I assume that this means that its much easier for your stop
points to get missed.  This has happened to me a couple of times with
options, but it hasn't cost me more than a hundred dollars or so.  I assume
that this risk is doubled (at least!) too.  It seems like it's worth it, but
I just want to make sure I know what I'm getting into.

A (hopefully final) dumb question; if one wants to play the downside
on the Index, or whatever future, do you just "sell it", like you would
short a regular stock?  If so, then does the same rule of waiting for an
uptick apply before being able to sell (short) it?   I would see this as
disadvantageous than playing it on the upside then.  Also, in this respect
it also seems more disadvantageous than being able to just purchase a put
option.


                                                        Fred

> I'm still wondering about something.  Since the S&P Index fluctuates with
> more volatility, I assume that this means that its much easier for your stop
> points to get missed.  
    
    This is called "slippage".  Frequently happens especially at intuitive or
    technical resistance levels.  If you have a sell stop at, say, 438.40, you
    might get filled at .35 or .30 especially if it's a new low for the day
    or half-day.  However the S&P is very liquid and unless some catastrophe
    is involved (there's 1-2 of them a year in S&Ps) you won't see much
    worse that a 2-tick ($50) slippage.  That's 'cause there's always those
    floor traders who want to buy a new low or sell a new high.  So you
    should find better liquidity in futures than options -- LESS slippage.
    
> A (hopefully final) dumb question; if one wants to play the downside
> on the Index, or whatever future, do you just "sell it", like you would
> short a regular stock?  
    
    You "Just Sell It".  There is no tick rule.  Many futures have daily
    trading limits, which might prevent you (or anybody else) from getting
    filled, but there's no such thing as a tick rule.
    
      John

    No tick rule!?  Excellent!
    
    You're on-the-money (a nice place to be), John.  The slippage I've been
    seeing with some of the options plays I've had does seem to be related
    to lack of volume.  After getting those dreaded "Hello, Mr. Eines, I'm
    calling to report that you got stopped out at..." phone calls, I'd ask
    the broker "why was the sell price so much lower than my stop?".  The
    answer, a very simple "because no one was paying that price".  I can 
    see that with more volume and greater liquidity, that that particular
    risk is minimized.
    
    Well, I am psyched, but more research is in order.  Thanks for the info
    though.  See you on the battlefield.
    
    
    							Fred

> I did a few preliminary calculations and see what you mean; even
> deep-in-the-money options do not generate as much of a "delta" as the index
> itself.  I'm glad the broker kept ragging on me!  

    The term "delta" has a specific meaning in Option parlance that being
    the absolute $ change of the contract divided by the
    absolute $ change of the instrument (or derivative in this case).  This
    is the partial of the option price with respect to the target.

    On the other hand options can offer greater leverage than owning the
    future depending on the margin requirements.

    Also note that virtually any future position can be offset through the use
    of options. For example a long Future position can be equated to
    a long Call and short put.

    -Bob