Market Analysis and Strategies

[TOM4CWB]

[QUOTE=TechAnalyst;501519]I know there's a world of hurt out there right now and I don't mean to be insensitive (it's impacting me too) but if there was ever a time to ask the question this is it - is there no interest in or need for helpful market analysis and strategies?

Dear TechAnalyst and Errol;

If I sell a $1015 Call Jan 22 Canola option for $51/t, how much margin per tonne must I maintain in my futures trading account? What about selling Calls and buying Puts at or above the market?

Thanks

[TechAnalyst]

The exchange regulated minimum margin requirement is $1518/20t contract or $75.90/t for futures contracts. Individual brokers can and likely will require more.

Short option positions have margin requirements based on risk assessments and may be as high as a full futures margin requirement (min $75.90/t).

The more important thing to keep in mind in this case is by selling (or writing) the call option, you are agreeing to assume a short futures position at $1015/t (if the market moves above). Should prices run up to $1315/t for example, you would have to meet $300/t margin calls while still maintaining the initial requirement.

It makes it very important to have the physical canola to sell at the higher price to offset the loss on the short option.

You certainly can use the premium to pay for a put option if you are concerned prices are at risk of falling in that time frame. It is called a collar and establishes a price range.

For example, if you sold a Jan 1015 call for $51/t and bought a Jan 810 put for the same, with a $-25 basis you would leave yourself a minimum price of $785/t or $17.80/bu with a maximum price of $990/t or $22.45/bu. There is no cost or premium from the options, they offset one another. Margin requirements and commissions are your only other considerations.

Of course if you are in an area with $+25/t basis levels you would add $50/t to the min and max values.

Hope that helps.

[TOM4CWB]

The exchange regulated minimum margin requirement is $1518/20t contract or $75.90/t for futures contracts. Individual brokers can and likely will require more.

Short option positions have margin requirements based on risk assessments and may be as high as a full futures margin requirement (min $75.90/t).

The more important thing to keep in mind in this case is by selling (or writing) the call option, you are agreeing to assume a short futures position at $1015/t (if the market moves above). Should prices run up to $1315/t for example, you would have to meet $300/t margin calls while still maintaining the initial requirement.

It makes it very important to have the physical canola to sell at the higher price to offset the loss on the short option.

You certainly can use the premium to pay for a put option if you are concerned prices are at risk of falling in that time frame. It is called a collar and establishes a price range.

For example, if you sold a Jan 1015 call for $51/t and bought a Jan 810 put for the same, with a $-25 basis you would leave yourself a minimum price of $785/t or $17.80/bu with a maximum price of $990/t or $22.45/bu. There is no cost or premium from the options, they offset one another. Margin requirements and commissions are your only other considerations.

Of course if you are in an area with $+25/t basis levels you would add $50/t to the min and max values.

Hope that helps.

Still not sure how much margin I will need to maintain if I Buy the $810 put and sell the $1010 call the day I transact this position.

Does the cost value of the $810 put offset the Call $1010 position?

If the Jan 22 Canola goes up $50/t to $960/t and we assume &100/t at the money $910 puts and calls, I then owe $50/t margin as the $1010 Call is then worth $75/t and the $810 put becomes worth $25/t for arguments sake… the put may still be worth $30/t and the $1010 call worth $70/t leaving then a margin requirement of $40/t to reflect the actual differences between the two under laying options values?
Net of brokerage fees of course…

Hope I am on track!
Cheers

[TechAnalyst]

You're on the right track.

It's hard to give a more definite total because actual margin requirements are set by the exchanges using Span assessments (Standard portfolio analysys of risk). It tries to determine the maximum risk you have for a certain period of time.

It is safer to over estimate the margin requirement than under so the best is likely figure on a margin requirement equal to a short futures position (min $79.50/t) plus the net of the call value (short) minus the put value (long).

If the call is worth 75 and the put 25, the total margin requirement may be (79.50 + (75-25)) or 129.50/t. (For that day)

The Span file might conclude less is required or the individual broker may want more but that gives you an idea.

Again, better to overestimate the requirements than under.

[TOM4CWB]

You're on the right track.

It's hard to give a more definite total because actual margin requirements are set by the exchanges using Span assessments (Standard portfolio analysys of risk). It tries to determine the maximum risk you have for a certain period of time.

It is safer to over estimate the margin requirement than under so the best is likely figure on a margin requirement equal to a short futures position (min $79.50/t) plus the net of the call value (short) minus the put value (long).

If the call is worth 75 and the put 25, the total margin requirement may be (79.50 + (75-25)) or 129.50/t. (For that day)

The Span file might conclude less is required or the individual broker may want more but that gives you an idea.

Again, better to overestimate the requirements than under.

Just going short at $910/t costs less margin?($50 initial plus $50 increased margin if market moves to $960) requires then $100/t margin at $960/t.

Makes no sense to do the Collar spread then… even if the risk is less at the expiration because the reward is less as well… put is $100/t out of the money.

Hard to understand how this makes any sense.

Cheers

[TechAnalyst]

Just going short at $910/t costs less margin?($50 initial plus $50 increased margin if market moves to $960) requires then $100/t margin at $960/t.

Makes no sense to do the Collar spread then… even if the risk is less at the expiration because the reward is less as well… put is $100/t out of the money.

Hard to understand how this makes any sense.

Cheers

There are two separate issues here.

The reason for the collar compared to being short is to keep an additional $100/t upside potential gain in place in exchange for the added $100/t risk.

The short at $910 is a better plan if you think the market is more likely to fall than rise. The collar would make more sense if you expected the opposite but still wanted to limit your risk.

As far as cash flow and margin requirements go, I'm not sure where you got the initial margin requirement of $50/t from compared to the minimum I see and have used in this example of $79.50/t.

If you want to use your $50, then the margin requirement when the call was worth $75 and the put $25 would be up to $50+(75-25)=100/t.

I would suggest keeping net price and margin requirement considerations separate for clarity.

Hope that helps.

[TOM4CWB]

There are two separate issues here.

The reason for the collar compared to being short is to keep an additional $100/t upside potential gain in place in exchange for the added $100/t risk.

The short at $910 is a better plan if you think the market is more likely to fall than rise. The collar would make more sense if you expected the opposite but still wanted to limit your risk.

As far as cash flow and margin requirements go, I'm not sure where you got the initial margin requirement of $50/t from compared to the minimum I see and have used in this example of $79.50/t.

If you want to use your $50, then the margin requirement when the call was worth $75 and the put $25 would be up to $50+(75-25)=100/t.

I would suggest keeping net price and margin requirement considerations separate for clarity.

Hope that helps.

In a round about way… it does.

If I were to be able to know that the futures were going to close on expiration of the option say $1000 , I would be best to sell the $1000/t call for $50 now, then sell the cash canola on that expiration day for the same $1000/t. Price received total $1050/t total for my canola.

Cheers