FTSE 100 index options are option contracts in which the underlying value is based on the level of the FTSE 100, the UK equivalent of the Dow Jones Industrial Average and tracks the performance of the top 100 largest companies by market capitalization listed on the London Stock Exchange.
The Mini FTSE 100 index option contract has an underlying value that is equal to 1/10th of the level of the FTSE 100 index. The Mini FTSE 100 index option trades under the symbol of UKX and has a contract multiplier of $100.The UKX 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|
|Mini FTSE 100 Options||UKX||1/10th of FTSE 100||$100 |
(Full Contract Specs)
If you are bullish on the FTSE 100, you can profit from a rise in its value by buying Mini FTSE 100 (UKX) call options. On the other hand, if you believe that the FTSE 100 index is poised to fall, then UKX put options should be purchased instead.
The following example depict a scenario where you buy a near-money UKX call option in anticipation of a rise in the level of the FTSE 100 index. Note that for simplicity's sake, transaction costs have not been included in the calculations.
You observed that the current level of the FTSE 100 index is 3,898.85. The UKX is based on 1/10th of the underlying FTSE 100 index and therefore trades at 389.89. A near-month UKX call option with a nearby strike price of 390 is being priced at $25.99. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $2,599.00.
Assuming that by option expiration day, the level of the underlying FTSE 100 index has risen by 15% to 4,483.68 and correspondingly, the UKX is now trading at 448.37 since it is based on 1/10th of the underlying FTSE 100 index. With the UKX 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 (448.37 - 390.00) x $100 = $5,836.77 from the option exercise. Deducting the initial premium of $2,599.00 you paid to buy the call option, your net profit from the long call strategy will come to $3,237.77.
|Profit on Long UKX 390 Call Option When FTSE 100 at 4,483.68|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(448.37 - 390.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$5,836.77 - $2,599.00|
|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 UKX 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 UKX option sale will still be equal to it's intrinsic value.
One notable advantage of the long Mini FTSE 100 call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the UKX call option.
Suppose the FTSE 100 index had dropped by 15% instead, pushing the UKX down to 331.40, which is way below the option strike price of 390. 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 $2,599.00.
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