The following are some (four) basic examples of how you can use the CBOT DJIA futures and futures options for trading or risk management. 1. BUYING FUTURES Situation: You are bullish on the stock market and expect a near-term rally in stock prices. Strategy: Buy CBOT DJIA futures contracts. If you expect a rally in the stock market, you could temporarily increase your stake in equities by going long the CBOT DJIA futures contract. Assume you purchase a September futures contract at 8,900. Two months later the DJIA has rallied to 9,220. You liquidate your position by selling the September futures contract at 9,220, capturing a market advance of 320 points, or $3,200.00 (less commissions and fees), on your futures transaction. (Futures have a multiplier of $10.00.) Of course, if you purchased it at 8,900 and it then went down 320 points to 8,580, you would have lost $3,200.00 (plus commissions and fees) on your futures transaction! By choosing futures over the actual purchase of the individual stocks, you are able to increase your market exposure more quickly and easily. Because payment on a futures contract is not due at the time of the transaction, you need deposit only a small amount of the contract value as margin. When you subsequently offset your position with a short contract, the final gains or losses on your trade pass through the account and the position is closed. 2. SELLING FUTURES Situation: You expect a decline in stock prices and want to short the market. Strategy: Sell CBOT DJIA futures contracts. Assume that you believe blue chips are overvalued, and decide to sell a March futures contract at 9,300. One month later you suspect that the market has temporarily bottomed out. You buy the futures contract back at 9,130. This results in a gain of 170 points, or $1,700.00 (less commissions and fees.) But once again, if you sell it at 9,300 and it then shoots up 170 points and you buy it back at 9,470, you would have a loss of $1,700.00 (plus commissions and fees.) The ability to execute a bearish position is a very attractive feature of the CBOT DJIA futures contract. In the past, selling the Dow was even more difficult than buying it. But in the futures market, going short is just as easy as going long. And with futures, unlike the stock market, you can sell on a downtick. 3. BUYING CALLS Situation: You expect a rally in stock prices but want to limit your exposure to the amount you paid for the option (plus commissions and fees of course), in the event the market declines instead. Strategy: Buy CBOT DJIA call options. Assume that the DJIA is at 8,700. You expect prices to continue to rally and break through the 9,000 mark, but you're also concerned that the market may become overvalued - triggering a downturn in prices. You decide to buy a CBOT DJIA call option with a strike price of 8,900, with a premium of 16.50 points, or $1,650.00. (Options have a multiplier of $100.00.) The call option gives you the right to enter a long futures position at 8,900 at any time before the expiration of the option. Over the next five weeks, the market trades up to 9,135. You decide to sell your call option, which is now valued at 33.50 points, or $3,350.00. The current premium of 33.50 points reflects its change in both intrinsic and time value. Since the call option gives you the right to go long the futures at 8,900, and the index is now valued at 9,135, the option has moved in the money by 23.50 points - its intrinsic value. The remaining 10.00 points (33.50 points in total premium, less 23.50 points in intrinsic value) is the option's current time value. Your net gain on the trade is $1,700.00 (the current value of $3,350.00 less the initial purchase price of $1,650.00.) (Your net gain on the transaction however will be a bit lower after accounting for commissions and fees.) Buying call options is a more conservative bullish strategy than going long the futures contract because, in the event you're wrong, your potential losses have a defined limit and can be tailored to match your risk preferences. For example, if market prices decline instead of go up, your losses would be limited to, the $1,650.00 (plus commissions and fees) paid up front for the option. No limit is placed, however, on your potential gains. 4. BUYING PUTS Situation: You own a portfolio of blue-chip stocks. You're concerned about a possible downturn in prices and want to try and preserve the value of your portfolio. At the same time, however, you don't want to preclude yourself from participating in any further market gains. Strategy: Buy CBOT DJIA put options. Buying put options allows you to insure your portfolio's value while retaining the opportunity to participate in a bull market. For example, assume that the DJIA index is at 8,850. You decide to, buy one 8,800 December put option for $1,950.00 plus commissions and fees. Holding the 8,800 put gives you the right to take a short position in the December futures contract at $88,000.00 anytime before the put option expires in December. If the December futures contract drops to 8,400 at expiration, you will have a net gain on your option position of $2,050.00 [(8,800 - 8,.400) x $10.00 - $1,950.00 (less commissions and fees).] This gain can be used to offset losses on the value of the underlying stocks you hold. If the bull market continues through December, however, your stocks will gain in value and your put will expire worthless. In this case, the $1,950.00 plus the commissions and fees you spent to purchase the put can be viewed as the cost of insurance. Like other types of insurance, CBOT DJIA futures options can help you feel protected, especially in times of market uncertainty. Once again, the preceding examples were just some of a whole myriad of trading strategies that can be employed with the CBOT DJIA futures and futures options contracts.
These were very basic examples of options strategies.
There are many other things to consider when using options such
as delta, volatility and time value (time decay) to name just a few.
This is not intended to be a complete study of options, their
characteristics or trading strategies. These examples are merely
simple illustrations to understand the general mechanics of an option
purchase.
To learn more about the CBOT DJIA futures and
futures options contracts,
The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content. This does not contain specific recommendations to buy or sell at particular prices or times, nor should any of the examples presented be deemed as such. There is a risk of loss in trading futures and futures options and you should carefully consider your financial position before making any trades. Furthermore, no representation is being made that any of the examples shown resulted in actual trades or will result in actual trades. It should also be noted that when calculating profits and or losses, consideration should be given for commissions and fees. This is not intended to be a complete study of chart patterns or technical analysis and should not be deemed as such. This is also not, nor is it intended to be, a complete study of futures, futures options, trading strategies or the Chicago Board of Trade Dow Jones Industrial Average contracts.
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