1 / 88

INTRODUCTION TO NYMEX ENERGY OPTIONS Michael Korn mkorn@nymex

INTRODUCTION TO NYMEX ENERGY OPTIONS Michael Korn mkorn@nymex.com. GROWTH OF NYMEX OPTIONS. Option Contract Starting Date Volume 1999 Crude 11/14/86 8.16 million Heat 6/26/87 .69 Unleaded Gas 3/13/89 .60 Natural Gas 10/02/92 3.85.

fritz-wells
Download Presentation

INTRODUCTION TO NYMEX ENERGY OPTIONS Michael Korn mkorn@nymex

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. INTRODUCTION TO NYMEX ENERGY OPTIONSMichael Kornmkorn@nymex.com

  2. GROWTH OF NYMEX OPTIONS Option Contract Starting Date Volume 1999 Crude 11/14/86 8.16 million Heat 6/26/87 .69 Unleaded Gas 3/13/89 .60 Natural Gas 10/02/92 3.85

  3. WHY OPTIONS • Risk/Reward Defined • Protection for Adverse Price Trends • Participation in Favorable Price Trends

  4. New York Mercantile Exchange Doing business for over 128 years

  5. ODDS • What are the odds that crude prices will trade $7 lower in the next 90 days? • What are the odds crude will trade in a $5 range over the next 40 days? • What is the probability crude will move $3 higher over the next 5 days?

  6. OPTION FUNDAMENTALS Options: Volatility Price Time

  7. OPTION FUNDAMENTALS Motion in markets: Volatility is the distance price travels over time. (speed = distance over time)

  8. Topics • What makes Options Tick • Put - Call Parity • Volatility: Central Tendency, Standard Deviation and Tail • Price Models • Role of Market Makers Option Pit Tour (2:30 to 3:15) • Strategies • Option Characteristics • Price Curves: Skew and Volatility Term Structures • Calendar Spread Options (an Introduction)

  9. OPTION FUNDAMENTALS What are Options?

  10. BUYING OPTIONS: • Paying Premium for the Right to Participate.

  11. BUYING CALLS • Buying the Right to go Long Futures at a Predetermined Price.

  12. BUYINGPUTS • Buying the Right to go Short Futures at a Predetermined Price.

  13. BUYING CALLS Example: On March 6, 2000: • NYMEX WTI (May Delivery) = $30.02 • NYMEX WTI $32 Call = $.65 • Expiration Date is April 14, 2000

  14. NYMEX CRUDE OPTIONS Strike Price = .50 Intervals • 29.00 • 29.50 • 30.00 • 30.50 • 31.00 • 31.50

  15. LONG CALL Payoff E = Strike px St = Asset px at expiration 0 St E Asset Price

  16. LONG PUT Payoff E=Strike px St= Asset px at expiration 0 St E Asset Price

  17. SELLING OPTIONS: Selling the Right to the Buyer Collecting Premium

  18. SHORT CALL Payoff E =Strike px St =Asset px at expiration 0 St E Asset Price

  19. SHORT PUT Payoff E = Strike px St = Asset px at expiration E St 0 Asset Price

  20. MONEYNESS: Out-of-the-Money At-the-Money In-the-Money Relationship Between Option’s Strike Price and Price of Underlying Commodity

  21. MONEYNESS Premium: Intrinsic = How much in the money. Extrinsic = How much out of the money (time premium).

  22. PUT - CALL PARITY • The Extrinsic Value of Put and Call are Equal when they are the Same Strike and Same Expiration Date.

  23. ODDS • What are the Odds that Crude Prices will Trade $2 Higher in the next 5 Days? • What are the Odds Crude Prices Will Trade in a $4 Range During the Next 20 Days?

  24. THE FACTORS DETERMINING THE ODDS: • Price of Underlying • Strike Price • Volatility • Time

  25. MOTION • Delta • Time • Volatility Volatility Price Time

  26. DELTA Futures Price, Strike Price Relationship • Definition: How much the option premium is expected to move on a change in the futures price.

  27. DELTA Out $ At $ In $ 1.0 0 .5

  28. DELTA (+) (-) Long Call Long Puts Short Puts Short Calls

  29. GAMMA • Definition: How much the option’s delta is expected to move on a change in futures price.

  30. TIME • Days to Expiration.

  31. EXPIRATION American Versus European

  32. Time Decay atm Premium itm otm 0 Passage of time

  33. Volatility • Intuitive Understanding: • Precise Definition: The annualized standard deviation of returns.

  34. PROBABILITY Probability Distributions: The distribution of random variables.

  35. PROBABILITY mean .0214 .0214 .1359 .3413 .3413 .1359 -3 -2 -1 0 +1 +2 +3 Frequency Distribution

  36. PROBABILITY More About Volatility.

  37. PROBABILITY Measurements of Central Tendency: Mean Median Mode Prices tend to “cluster around the middle”.

  38. PROBABILITY Measurements of Variability: CL = $/bbl A B 30.75 31.50 30.30 31.00 30.00 30.00 29.70 29.00 29.25 28.50 Time Period B has Greater Variation than A Average Price for Both Time Periods: $30.00 .

  39. PROBABILITY Measures of Variability: • Range • Deviation • Variance • Standard Deviation

  40. PROBABILITY Range: The difference between the largest and smallest values.

  41. PROBABILITY Deviation: The distance of measurements away from the mean.

  42. PROBABILITY Variance: The sum of the squared deviations of Nmeasurements from their mean divided by (N - 1).

  43. PROBABILITY Standard Deviation: The positive square root of variance.

  44. PROBABILITY Standard Deviation; The Significance: • The interval from one standard deviation below the mean to one standard above the mean contains approximately 68% of all measurements. • Two standard deviations contain 95% of all measurements. • Three standard deviations contain almost all measurements.

  45. PRICE MODELS Goal: To Assign Values to the Odds.

  46. Price Model Black Scholes: Binomials: Implied Binomial Trees: The Evolution of Option Valuation Models

  47. Price Model Black-Scholes: • Futures Price • StrikePrice • Volatility • Time • Risk Free Rate

  48. PRICE MODEL Black-Scholes Based on this supposition: Option: Asset: + $.50 +$1.00 - $.50 - $1.00 Create hedge position by going short two options and long one asset. Losses in one will be offset by gains in the other.

  49. Price Model Binomial Distribution: 2702 2701 2700 2700 2699 2698

  50. Price Model The Path of Independent, Random Variables:

More Related