FTSE 250 index options are option contracts in which the underlying value is based on the level of the FTSE 250, a capitalisation-weighted index of 250 UK companies listed on the London Stock Exchange (LSE). Component stocks of the FTSE 250 index constitute the 101st to the 350th largest companies that are listed on the exchange, based on market capitalization.
The Mini FTSE 250 index option contract has an underlying value that is equal to 1/10th of the level of the FTSE 250 index. The Mini FTSE 250 index option trades under the symbol of FTZ and has a contract multiplier of $100.The FTZ 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 250 Options||FTZ||1/10th of FTSE 250||$100 |
(Full Contract Specs)
If you are bullish on the FTSE 250, you can profit from a rise in its value by buying Mini FTSE 250 (FTZ) call options. On the other hand, if you believe that the FTSE 250 index is poised to fall, then FTZ put options should be purchased instead.
The following example depict a scenario where you buy a near-money FTZ call option in anticipation of a rise in the level of the FTSE 250 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 250 index is 6,351.52. The FTZ is based on 1/10th of the underlying FTSE 250 index and therefore trades at 635.15. A near-month FTZ call option with a nearby strike price of 640 is being priced at $42.34. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $4,234.00.
Assuming that by option expiration day, the level of the underlying FTSE 250 index has risen by 15% to 7,304.25 and correspondingly, the FTZ is now trading at 730.42 since it is based on 1/10th of the underlying FTSE 250 index. With the FTZ 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 (730.42 - 640.00) x $100 = $9,042.48 from the option exercise. Deducting the initial premium of $4,234.00 you paid to buy the call option, your net profit from the long call strategy will come to $4,808.48.
|Profit on Long FTZ 640 Call Option When FTSE 250 at 7,304.25|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(730.42 - 640.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$9,042.48 - $4,234.00|
|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 FTZ 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 FTZ option sale will still be equal to it's intrinsic value.
One notable advantage of the long Mini FTSE 250 call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the FTZ call option.
Suppose the FTSE 250 index had dropped by 15% instead, pushing the FTZ down to 539.88, which is way below the option strike price of 640. 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 $4,234.00.
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