XJO Index Options query

[gfresh]

Hi,

I am considering buying one or more XJO index contracts (ETOS) as a hedge against any significant downside of my main share portfolio...

Now if I purchase say 1x contract XJOVD (June 08 expiry, 4500 points).. for $x, say it's May or so and say the XJO is then 4900 points and looks like not much chance of being in the money. At that point obviously I'd expect the price quoted to be much lower than now.

However, am I able to "sell to close" the option at that price in May? or am I 'stuck' with the option until June expiry (where it will probably expire worthless). While the ASX literature says I can sell the contract before expiry, is this actually possible in practice? Who will purchase the other side from me if I do attempt to sell?

Will the market maker do so at their discretion if I put an ask price out there ? (would they bother if it's already so "out of the money"?) or do I have to hope some other punter comes along and buys my contract(s) for the price I'm asking?

My main question I guess is are these index options a "all or nothing" investment at the moment as traded on our ASX Options market?? Once placed, am I able to receive a fraction of the original buy back later on if closed? or do I have to accept "if wrong" I lose the entire amount paid for the contract?

Any practical experience from those who have traded index options on our ASX would be great...

 

[gfresh]

(Put option above, sorry, wasn't mentioned)

 

[Trembling Hand]

Buying an index put 15% lower than the current market is not going to give you a great hedge. As your question points out you are going to need another huge move down just to get in the money. Why are you looking so low for a option hedge?

 

[wayneL]

Hi,

I am considering buying one or more XJO index contracts (ETOS) as a hedge against any significant downside of my main share portfolio...

Now if I purchase say 1x contract XJOVD (June 08 expiry, 4500 points).. for $x, say it's May or so and say the XJO is then 4900 points and looks like not much chance of being in the money. At that point obviously I'd expect the price quoted to be much lower than now.

However, am I able to "sell to close" the option at that price in May? or am I 'stuck' with the option until June expiry (where it will probably expire worthless). While the ASX literature says I can sell the contract before expiry, is this actually possible in practice? Who will purchase the other side from me if I do attempt to sell?

Will the market maker do so at their discretion if I put an ask price out there ? (would they bother if it's already so "out of the money"?) or do I have to hope some other punter comes along and buys my contract(s) for the price I'm asking?

My main question I guess is are these index options a "all or nothing" investment at the moment as traded on our ASX Options market?? Once placed, am I able to receive a fraction of the original buy back later on if closed? or do I have to accept "if wrong" I lose the entire amount paid for the contract?

Any practical experience from those who have traded index options on our ASX would be great...

* You can sell to close anytime you want.

* As you suspect, there might not be a quote for the option, but you can request a quote; speak to your broker. Have a look now to see if there are quotes on index options 100s of points out of the money with a month to go. That should tell volumes.


There would be no problem trading this way on the larger US options market

 

[gfresh]

Thanks for the responses..

4500 was maybe a bit of an extreme example.. however with the XJO sitting at 5100 right now, maybe it's not so silly.

In January, how many would have anybody thought a drop of 1200 points in the XJO (for March expiry) was that likely

However, I will probably choose one already in the money, or close to it.. to be safer

 

[chops_a_must]

However, I will probably choose one already in the money, or close to it.. to be safer

You should be able to get a put for about 4700. Maybe not this month, but perhaps even the following.

Bear in mind that the volatility means you'll have to pay a relatively large premium.

This may mean you might be better off writing a call. Perhaps Wayne can comment on that.

 

[Mellow77]

I was also wondering about XJO ASX index options. I have not done any trade yet, just looking for opportunities.

Let’s say I have a put position in the money, exercise price 5550 expiring on 20th of March. Let’s imagine that the XJO is 5000 on the 20th of March.

The value of one contract would be 550 points.

Do I need to do anything on the 20th of March to receive the 'profit'? I understand that I can sell the position if there is a buyer. But what if there is no buyer?

I found this paragraph in ASX index fact sheets:

How do they settle?
XJO Index Options cash settle against the value of the S&P/ASX 200 Index. The settlement price used will be the ASX Opening Price Index Calculation (OPIC). The OPIC is based on the first traded price of each constituent stock in the index on the expiry day. If a constituent stock does not trade on the expiry day, the last traded price from the previous trading day will be used.

Is my broker (ComSec) going to settle the position after the close on 20th of March - give me the 'profit'?

Or if I do nothing the options just expire worthless?

Many thanks for reply.

ps:
Sorry if this has been answered before or someone feels it is a stupid question. Just try to clear my view.

 

[sails]

Mellow77 - here are a couple of links from the ASX with information on index options:

http://www.asx.com.au/investor/options/trading_information/index_options.htm

And this one, among other things, explains that index options are not automatically exercised at expiry: http://www.asx.com.au/investor/options/how/library/2006/get_on_board_xjo.htm

Here is an excerpt which may be of interest to you:

Cash settled but not automatically

Index options are cash settled on expiry however like all options an instruction to exercise is mandatory. Failure to exercise an ITM option will not result in cash settlement.

An instruction to exercise can be either manual (call broker) or automatic (have your account set to automatically exercise ITM options on expiry). If you’re not sure of the status of your options account contact your broker today.

Strongly suggest you find out from your broker how they handle index options. I have found brokers to have varying policies particularly with options, so it pays to know exactly where you stand.

Hope this helps!

 

[im sparticus]

First post, hi everybody!

it said that the index options were european in style and can only be exersized at expiry. can someone explain how/if this would affect things besides the obvious?

 

[wayneL]

First post, hi everybody!

it said that the index options were european in style and can only be exersized at expiry. can someone explain how/if this would affect things besides the obvious?

* The pricing model used is different, thought in practice the difference is not great.

* The biggest difference is when you are short the option. If you are short an american style option, you could be assigned if there is a economic reason for the owner to exercise. As an example in practice: If you are short a deep in the money put, you will likely be assigned. However if you have a european style option, this is not possible. You can be short right up till expiry and no one is going to #### up the nice spread you have on, by assigning you on a short put leg.

 

[sails]

First post, hi everybody!

it said that the index options were european in style and can only be exersized at expiry. can someone explain how/if this would affect things besides the obvious?

By the "obvious" I assume you are meaning what happens at expiry. In addition, I believe they are priced differently to American style options as there is no risk or opportunity of early exercise/assignment.

Lawrence G. McMillan's book "Options as a Strategic Investment" explains it well. Part 5 of this book has a lot on index options. IMHO, a valuable asset to any serious option trader's library.

I would type out an applicable paragraph, but not sure of copyright rules - so here is a summary:

ITM European put options are cheaper than their American counterpart due to the cost of carrying the position to expiry. Deep ITM puts can even trade at a discount - the higher interest rates are, the deeper the discount.

Hope this helps