DJUA index options are option contracts in which the underlying value is based on the level of the DJUA, is a price-weighted index of 15 of the largest, most liquid utility stocks listed on the New York Stock Exchange (NYSE).
The Dow Jones Utility Average index option contract has an underlying value that is equal to the full value of the level of the DJUA index. The Dow Jones Utility Average index option trades under the symbol of DUX and has a contract multiplier of $100.The DUX 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 Utility Average Options||DUX||Full Value of DJUA||$100 |
(Full Contract Specs)
If you are bullish on the DJUA, you can profit from a rise in its value by buying Dow Jones Utility Average (DUX) call options. On the other hand, if you believe that the DJUA index is poised to fall, then DUX put options should be purchased instead.
The following example depict a scenario where you buy a near-money DUX call option in anticipation of a rise in the level of the DJUA index. Note that for simplicity's sake, transaction costs have not been included in the calculations.
You observed that the current level of the DJUA index is 337.37. The DUX is based on the full value of the underlying DJUA index and therefore trades at 337.37. A near-month DUX call option with a nearby strike price of 340 is being priced at $22.49. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $2,249.00.
Assuming that by option expiration day, the level of the underlying DJUA index has risen by 15% to 387.98 and correspondingly, the DUX is now trading at 387.98 since it is based on the full value of the underlying DJUA index. With the DUX 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 (387.98 - 340.00) x $100 = $4,797.55 from the option exercise. Deducting the initial premium of $2,249.00 you paid to buy the call option, your net profit from the long call strategy will come to $2,548.55.
|Profit on Long DUX 340 Call Option When DJUA at 387.98|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(387.98 - 340.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$4,797.55 - $2,249.00|
|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 DUX 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 DUX option sale will still be equal to it's intrinsic value.
One notable advantage of the long Dow Jones Utility Average call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the DUX call option.
Suppose the DJUA index had dropped by 15% instead, pushing the DUX down to 286.76, which is way below the option strike price of 340. 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 $2,249.00.
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!
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®.... [Read on...]
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]