Futures

1. Futures • Seller guarantees delivery of something at a set price for a fixed period of time (usually <90 days) • Buyer can demand delivery at price until contract expires • If spot price is below contracted price, seller benefits; seller is said to be SHORT • If spot price is above contracted price, buyer benefits; buyer is said to be LONG (c) 2001 by Russell G. Todd

2. 2 Kinds of Futures • Physical futures contracts: corn, oil, silver, cattle, etc. • Deliveries are ownership papers, not 5,000 bushels of wheat • Financial futures: currencies, stock indices, bond prices, etc. • Deliveries are in cash--difference between contracted price and spot price (c) 2001 by Russell G. Todd

3. How Futures Work • Contracts are bought on MARGIN—a percentage of the purchase price • Wheat is $3.50 a bushel; buy 5,000 bushel contract valued at $17,500 • If margin is 10%, only $1,750 to buy • Margin money must be kept constant • If wheat goes to $3.25 a bushel, contract worth $16,250, down $1,250 • $500 left in margin account • Margin call of $1,250 to keep it constant

4. Uses of Futures • Buyers (e.g., corn for Post Toasties) can lock in a purchase price • Sellers (corn farmer) can lock in selling price • Speculators can go long or short, win or lose big on leverage • Traded on CBT, CME, PBOT, NYFE, etc. (c) 2001 by Russell G. Todd

5. Wednesday May 30 7:15 PM ET Wednesday's Commodities Roundup NEW YORK (Dow Jones News) - Nearby gasoline futures plunged at the New York Mercantile Exchange Thursday as the cash market skidded ahead of futures contract expiration. Selling dominated the gasoline and crude markets Tuesday amid refinery restarts, big players liquidating positions, and others rolling positions into deferred months. ``Iraq hasn't changed anything yet, but they bear watching,'' said Bill O'Grady, analyst at AG Edwards. Crude prices had fallen earlier Wednesday on news Iraq is preparing 13 million barrels in crude shipments from Turkey's Ceyhan terminal during the first half of June. After markets closed, industry data for the week ended May 25 showed increasing U.S. inventories of motor gasoline and distillate stocks, which include heating oil and diesel fuel, but a decline in the amount of crude oil stocks. Unleaded gasoline futures for June dropped 3.46 cents a gallon to $1.04 a gallon and July crude fell 11 cents to $28.55 a barrel. Natural gas futures on the New York Mercantile Exchange settled at $3.981 per 1,000 cubic feet, a gain of 17.1 cents. June heating oil rose .13 cent to 77.60 cents a gallon. Brent crude from the North Sea for delivery in July fell 3 cents to $29.14 per barrel on London's International Petroleum Exchange. After markets closed Wednesday, the American Petroleum Institute reported that U.S. inventories of crude oil fell 3.9 million barrels to 321.9 million barrels from 325.9 million barrels.

6. After markets closed Wednesday, the American Petroleum Institute reported that U.S. inventories of crude oil fell 3.9 million barrels to 321.9 million barrels from 325.9 million barrels. Distillate fuel stocks, which include heating oil and diesel fuel, rose by 1.9 million barrels to 103 million barrels. Last year at this time, the amount of inventory was at 99.9 million barrels. The U.S. motor gasoline inventory rose by more than 1.6 million barrels to 206.1 million barrels, according to API, nearly 3 percent higher than the 200.5 million barrels at this time last year. In other commodity markets, gold futures on the Comex division of the New York Mercantile Exchange were trampled by a stampede of selling on Wednesday, rendering the term ``support levels'' virtually meaningless on their plunge lower. The leading June contract surrendered $8.20 to close at $265.70 a troy ounce. The rout took gold prices within $15 of 20-year lows, a level from which they had painstakingly built themselves up over the past two months. That left many wondering whether the $298 high glimpsed just nine days ago had been an illusion. World raw sugar futures declined on the Coffee, Sugar & Cocoa Exchange after a sell-off led by speculative commodity funds. The July contract fell 0.15 cent to 8.59 cents a pound after touching a one-month low of 8.40 cents. Cocoa futures fell on the CSCE on selling by speculative funds, although buying by consumers brought prices up from their lows. The July contract fell $39 to $964 a metric ton, after hitting a one-month low of $959.

7. Options • Call buyer pays “premium” for right to buy at fixed price for fixed time (usually < 90 days). Position is LONG. • Call seller gets premium, is obligated to deliver at the price until expiry. Position is SHORT. • Put buyer pays premium for right to sell at fixed price until expiry. SHORT. • Put seller takes premium, is obligated to deliver at the price until expiry. LONG. • Option’s stock price is called STRIKE PRICE (c) 2001 by Russell G. Todd

8. Kinds of Options • Options on commodities contracts • On currencies • On stocks, stock index futures • On interest rates • On bond futures • A “contract” is for 100 options • Traded on commodities exchanges • Option prices vary continually, like stocks (c) 2001 by Russell G. Todd

9. How an Option Works • Investor buys 10 call contracts on stock ZZZ. Stock at $55, strike $60, call at 75 cents, so $750 goes to seller. • Stock goes to $62, option price goes to $3. Buyer can either buy at $60 and sell at $62, or can just sell the contract for $3. • Trading contract is more profitable—big leverage, like futures. (c) 2001 by Russell G. Todd

10. Uses for Options • Locking in prices, speculating—like futures • To ensure against losses—buy a put on a stock already owned • Sell calls on stocks owned to generate income • Transaction costs are high (c) 2001 by Russell G. Todd

11. Option Price Movements • An option’s price is: --Time premium—how much left. -- Intrinsic value if “in the money.” -- Investor view of risk, volatility. • Two kinds of volatility -- Actual—how much asset price jumps around. -- “Implied”—how much option prices are jumping around. (c) 2001 by Russell G. Todd

12. Options Report: Trading Reflects Market's Hesitation  By Kopin Tan  06/01/2001  15:30 NEW YORK -(Dow Jones)- Option volatility fell as stocks edged ahead gingerly. But option trading lacked momentum and seemed to mirror investors' agonizing lack of consensus about how stocks will perform over the next few months. Many traders and investors held back as they sought to make sense of Friday's confusing flux of economic data and earnings news. The unemployment rate fell slightly instead of rising as many had anticipated, which some consider a welcome sign with positive ramifications for the economy and consumer spending. But early earnings warnings from BellSouth Corp. and DuPont Co. rattled investors and reminded them that the worst isn't over. With more companies - including BellSouth and, earlier this week, Sun Microsystems Inc. - blaming their woes in part on overseas operations, investors now have more reason to fret that the rot is spreading. Against this backdrop, many investors opted to play it safe. Many didn't stray far beyond tweaking their portfolios and hedging their bets. Here and there, investors picked spots to sell options against stock - which, while it generates income and boosts returns, isn't without risks since sellers of options take on obligations and could be caught if the market turns. With the Standard & Poor's 100 Index trading in a tight range, the Chicago Board Options Exchange's market volatility index, or VIX, dipped 2.25 to 23.71. VIX measures certain S&P 100 option prices to gauge investor sentiment and typically ranges between 20 and 30, although it tended to exceed the top of that range earlier this year.

13. Citigroup's longer-term calls traded briskly Friday, with at least one institutional investor focused on buying January 60 calls that expire 2003, confirmed a trader at Wolverine Trading, the specialist for Citigroup options at the American Stock Exchange. It isn't known what drove the call buying, but these out-of-the-money calls gain in value if the underlying stock appreciates, and the investor may be making a longer-term bet on the banking giant. Citigroup most recently was ahead $1.07 to $52.32. These January 60 calls that expire 2003 traded more than 10,000 contracts, compared with open interest of 3,597, and their implied volatility were slightly below their historical volatility. The calls rose 50 cents to $6.80 at the CBOE. Bank One Corp.'s calls, too, traded actively, with some investors opening new positions and buying just out-of-the-money November 40 calls. With the stock down 26 cents to $39.34, 3,381 contracts of the November 40 calls traded, compared with open interest of 2,113. These calls were at $2.65 at the Philadelphia Stock Exchange. Texas Instruments' options, on the surface, also showed possibly bullish expectations Friday. The put/call this session stood at a low 0.08, with nearly 900 puts traded to about 11,414 calls, according to 1010WallStreet.com. The dollar-weighted put/call ratio also is low, at about 0.09. Investors appeared focused on buying the October 35 calls, which traded 3,975 contracts at the CBOE and the Amex. With Texas Instruments unchanged at $34.12, these just out-of-the-money calls were down 20 cents to $4.30 at the CBOE. Open interest was 4,342. ADC Telecommunications' July 5 puts continued to trade heavily as investors continued selling these out-of-the-money puts. These investors earn some income and either does not expect ADC Telecom to fall below $5 by mid-July or are willing to buy stock at that price. The stock most recently was ahead 7 cents to $7.75. The July 5 puts edged down 5 cents to 10 cents on CBOE volume of 10,200 contracts, compared with open interest of 30,199. -Kopin Tan, Dow Jones Newswires; 201-938-2202; kopin.tan@dowjones.com