Re:thanks shooter(ELN)
Hi KP,
Well those Jan 04 7.50 calls sure had a good day up over 0.50.
As the 7.50 Jan 04 calls are now in the money, i believe when i mentioned this the calls where at 1.15, they closed today at 2.00.... nice gain hey!!
The math on formulating a future gain is quite difficult to say the least. As they are many forces at work and the formulas
are very complex, at least to me LOL.
I used to have a site that had a break down for derivatives, and the use of gamma, delta, ect ect.. all used in predicting how much a option possibly will rise for every point gained on the underlying security. And with all that you had to figure in implied volitilty... and with all that figuring, the best you could do was get a estimate, sometimes it was good, sometimes it wasnt.... as you still have to deal with all the action on the option itself.( Buy and sell orders).
I have since then lost the site... so i went to my Series 7 stuff, and did some reading for more info.
The best way to figure it, IMO, is using in the money calls.
You have premuim, one that will pay you no matter what, as long as the call stays in the money.
Example: ELN 7.50 calls are in the money.. the stock is 7.73
that is 23 cent premuim.If ELN goes to 10.00, the worst you will do is 2.27, thats the premuim. The 7.50 Jan 4 call is asking at 2.05.....and that does not include how much the price of option will go up. As that will be determined by the price of the security and the market action.
So, lets say, you have the 7.50 Jan 4 call, and you hold till expiration, and ELN is at 10.00.... you can not lose if you bought at 2.00... as you will still have your premium. Meaning, you excerise the option at 7.50... in reality you paid 7.73...you get the stock at 7.50, cash in at 10.00
Or just sell the option at a minimum of 2.23.... that is the beauty of "in the money options"... because as opposed to out of the money options, you will not lose all your investment cause you have a premium.
So thats how i figure using In the Money options.. i figure what is the worst i can do if the stock hits my target, by using the premium as my base.But that will usually be really low, as the price of the option will contiue to bid up as the stock goes up and attracts more option players.
Here is more info:
The price (value) of an option premium is determined competitively by open outcry auction on the trading floor of the CBOT. The premium is affected by the influx of buy and sell orders reaching the exchange floor. An option buyer pays the premium in cash to the option seller. This cash payment is credited to the seller's account.
Prices for T-bond and T-note futures contracts are quoted differently from the options premiums on these futures. Options on these contracts are quoted in 64th of a point. Therefore, a quote of -01 in options means 1/64, in futures, 1/32.
The option premium has two components: "intrinsic value" and "time value." The intrinsic value is the gross profit that would be realized upon immediate exercise of the option. In other words, intrinsic value is the amount by which the portion is in-the-money. (An option that is out-of-the- money or at-the-money has no intrinsic value.)
For example, in December, a June Treasury bond futures contract is priced at 82-00, while the June 80 call is priced at 3 10/64. The intrinsic value of the option is 2-00:
Bond futures 82-00
Option strike price 80-00
Intrinsic value 2-00
Time value reflects the probability the option will gain in intrinsic value or become profitable to exercise before it expires.
Time value is determined by subtracting intrinsic value from the option premium:
Time value = Option premium - Intrinsic value
= 3 10/64 - 2-00
= 1 10/64
Several other factors also have an impact on the premium. One is the relationship between the underlying futures price and strike price. The more an option is in-the-money, the more it is worth. A second factor is volatility. Volatile prices of the underlying commodity can stimulate option demand, enhancing the premium. The greater the volatility, the greater the chance the option premium will increase in value and the option will be exercised; thus, buyers pay more while writers demand higher premiums.
A third factor affecting the premium is time until expiration. Since the underlying value of the futures contract changes more within a longer time period, option premiums are subject to greater fluctuation.
Some parallels can be drawn between the time value component of an option premium and the premium charged for an automobile insurance policy. The longer the term of the policy, the greater the probability a claim will be made by the policyholder. This, of course, presents a greater risk to the insurance company. To compensate for this increased risk, the insurer charges a greater premium. For example, the total dollar cost of a one-year policy to insure the vehicle will be greater than a six-month policy since the vehicle is being insured for twice as long. The same is true with options on interest rate futures-the longer the term until expiration, and the more volatile the underlying market, the greater the option premium.
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