DJTA index options are option contracts in which the underlying value is based on the level of the DJTA, a price-weighted equity index of 20 of the largest, most liquid transportation companies listed on the NYSE and the Nasdaq stock exchange.
The Dow Jones Transportation Average index option contract has an underlying value that is equal to 1/10th of the level of the DJTA index. The Dow Jones Transportation Average index option trades under the symbol of DTX and has a contract multiplier of $100.The DTX index option is an european style option and may only be exercised on the last business day before expiration.
|Product Name||Symbol||Underlying Value||Contract Multiplier||Exercise Style|
|Dow Jones Transportation Average Options||DTX||1/10th of DJTA||$100 |
(Full Contract Specs)
If you are bullish on the DJTA, you can profit from a rise in its value by buying Dow Jones Transportation Average (DTX) call options. On the other hand, if you believe that the DJTA index is poised to fall, then DTX put options should be purchased instead.
The following example depict a scenario where you buy a near-money DTX call option in anticipation of a rise in the level of the DJTA index. Note that for simplicity's sake, transaction costs have not been included in the calculations.
You observed that the current level of the DJTA index is 2,777.95. The DTX is based on 1/10th of the underlying DJTA index and therefore trades at 277.80. A near-month DTX call option with a nearby strike price of 280 is being priced at $18.52. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $1,852.00.
Assuming that by option expiration day, the level of the underlying DJTA index has risen by 15% to 3,194.64 and correspondingly, the DTX is now trading at 319.46 since it is based on 1/10th of the underlying DJTA index. With the DTX now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:
Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier
So you will receive (319.46 - 280.00) x $100 = $3,946.43 from the option exercise. Deducting the initial premium of $1,852.00 you paid to buy the call option, your net profit from the long call strategy will come to $2,094.43.
|Profit on Long DTX 280 Call Option When DJTA at 3,194.64|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(319.46 - 280.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$3,946.43 - $1,852.00|
|Return on Investment||=||Net Profit / Investment|
In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the DTX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.
In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the DTX option sale will still be equal to it's intrinsic value.
One notable advantage of the long Dow Jones Transportation Average call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the DTX call option.
Suppose the DJTA index had dropped by 15% instead, pushing the DTX down to 236.13, which is way below the option strike price of 280. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $1,852.00.
Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.
Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)Click here to open a trading account at OptionsHouse.com now!