Derivatives: Futures and Options

Aaron French

Aaron French

Sports betting can seem confusing or complicated for beginners. If you keep these sports betting basics in mind, then you're well on your way to making the money you want. Remember to ease your way into online betting. Doing your research and having patience will pay off for you down the line.
Aaron French

On the other hand, a put option gives the buyer the right but not the obligation to sell a certain asset at an agreed price (strike price) by a certain date in the future. Be careful and ask all the right questions before you bring out the cash.

Since most of them involve the play of big money with very little in the way of initial investment, most people fail to foresee the impact they can have on their total funds. In a put option, the option will thus, only be exercised if the strike price is higher than the going market price at that specific point of time in the future. Since it is the ‘right but not the obligation’ to buy an asset, it is obvious that the call option will only be exercised if the strike price is lower than the going market price for the underlying asset at that certain time in the future. The only difference between a normal spot transaction and a forward transaction is the time span between the contract and its fulfillment. They offer the trader, the option of passing on some of the risk that he’s bearing over to another party. Inexperienced options expire once their time duration ends and it is only the premium paid for buying the option that exchanges hands between the two parties.

Understanding Futures and Options. On the other hand, with a short position (agreement to sell), your payoff will be the differential between the spot price of the commodity then and the futures price that you have agreed on (S – F).

Certain exotic types like Cacall, Caput, Barrier options, etc., lure investors with the greed of returns, but what happens many a time is that, traders fail to see the complexity involved in them. Futures are also agreements to buy or sell commodities at a certain predetermined price at some predetermined time in the future. Last but not the least, they lend monetary power to the traders, for they can take large positions in the stock market with the minimal amount of cash, i.e., by just paying the premium amounts.

Uses in Investment Finance

Mastering these instruments can make you a millionaire overnight, but it is good to understand them first. If you wish to play the stock markets, they offer an unbelievable amount of ground to play in, especially when it comes to hedging and risk management. Plain vanilla swaps, or the least complicated of swaps, allow two parties to swap their interest obligations. When you hold a long position in a forward contract, i.e., you have agreed to buy the underlying commodity at the agreed price, your payoff will be the differential between the forward price and the spot rate at that point in the future (F – S). On the other hand, forwards, swaps, and CDS are usually traded on the over-the-counter (OTC) markets. These are normal financial instruments where you just buy or sell shares of company XYZ (for $20 each, if market value equals the intrinsic value). Lack of knowledge coupled with greed, turn them into your worst possible nightmare. There is no monetary transaction to the contract when it is first negotiated, and money only changes hands on contract maturity. Here’s and example of an underlying asset.

Futures contracts are derivatives very similar to forward contracts, with the main difference being that while forwards are traded OTC, futures are traded on an exchange. For example, if a party has a fixed rate payment obligation and another one has a floating rate one, the two can swap their interest obligations with each other without settling the underlying debt.

They are very good risk management tools and are mainly used to hedge risks that a trader is routinely exposed to. Options are fantastic in their ability to cater to every possible need of the stock market trader. Futures and options trading is fantastic as a risk reducing measure (hedging), but may not be equally fantastic as a speculative bet, especially when you do not have the required expertise, neither in derivatives nor in forecasting.

Below are some of the uses as listed by John C. He either takes on another risk in return or makes a cash payment in exchange for the risk transfer.

Instruments like forwards and futures play a key role in giving directions to the market prices of the future. By definition, they are financial instruments that derive their intrinsic values from the underlying asset that they are based on. But before you start thinking about having bigger yields out of these instruments, know a little more about them. The intention is to buy low and sell high in two different markets and pocket the differential profits.

They allow for large portfolio position changes without incurring the buying and selling transaction costs.

Forwards Contracts and Futures Contracts

By definition, a forwards contract is ‘an agreement to buy or sell an asset for a predetermined, fixed price, at a certain time or date in the future’. They can be used to hedge open positions in stocks and this makes stock trading safer. While most financial assets have intrinsic asset values or prices, the intrinsic value of a derivative is based on the financial asset that forms the basis of a derivatives contract. Hull in his 1999 book titled ‘Options, Futures, and Other Derivatives’.

They are simple financial instruments. Shares of company XYZ have an intrinsic value of $20 each. While spot is an immediate, present tense contract, a forward is a later date or future tense contract that is just being finalized today. These are extremely powerful instruments and though, ‘no guts no glory’ does summarize the ‘higher risk, higher potential return’ mantra of investment finance; having open positions in them is never prudent. Marginal swings in the value of these shares can leave you with the outcome – ‘Investment – $100 and Total Loss $100, 000′. Options are not limited to the exchange traded derivatives markets and some are also traded on the OTC markets.

Interest rate swaps are also derivatives for they too derive their values from the underlying debt instrument. So for once, a financial instrument has been named correctly, an instrument that derives its value from some other asset is termed as a derivative.

These markets happen to be of two types. Think about it and you’ll know why so many have gone down while betting on these instruments. Know their uses and advantages, their drawbacks as well as their various types, namely forwards, swaps, futures and options.

What is the Derivatives Market?

Options are basically of two types, a call option and a put option. These non-standardized financial instruments bear some amount of credit risk, since no exchange interferes between the buyer and the seller. The only difference between them and the normal financial instruments (like shares), is just the little term called ‘underlying asset’. Even though you have invested only $100, the position that you had taken in the market was on $10000 shares. When investing in these instruments, be aware of the risk that you are taking on with that kind of leverage.

When they are used for hedging, they perform exceptionally well but when used for speculation, it is not prudent to rely too heavily on them. First the futures and options are traded on the exchange traded derivatives market and are standardized instruments with negligible credit risk. Many an investor have fallen to greed in this market, for everyone else, it is a risk management boon.

Whether futures and options, or swaps and forwards, all require careful and deliberate study. Two or more options can be combined together (synthetic options) to give the trader just the kind of payoff he was visualizing, given his forecasts of the future price movements on the stock exchange. Not understanding how they work and investing large sums of money in them blindly is a folly. Being traded on exchanges robs the futures of the customization that is available on forwards, but on the other hand, as exchanges play clearing houses in the transaction, futures have relatively lower credit risk.

Options Contracts

A point to note here is that, while futures and forwards are obligatory buy and sell contracts for the holders, options are rights and not obligations that the holder can choose on whether to exercise or not. You’ll know then, why all traders haven’t mastered the art yet and become overnight millionaires. For many of these instruments, small changes in the underlying asset can swing your fortunes from millionaire to bankrupt within seconds. The value of your option to either buy or sell the shares of this company, derives its value from the actual market prices of the underlying asset, in this case, the shares of company XYZ. How else is it possible that just investing $10 should help you take positions worth $1000. Research them and you will find a very grim picture, more houses have been broken with these instruments than have been built. A call option gives the buyer the right but not the obligation to buy a certain asset from the call option writer, by a certain date and for a certain price, known as the strike price. Forwards and futures prices are good reflectors of the price directions as well as the expected change in the future prices of the underlying asset.

They offer the traders an option to change the nature of their liabilities and exchange the risks associated with some of their unwanted liabilities with some more bearable ones.

They can be used to make arbitrage profits. They are a boon for the hedgers but not always so for the arbitrageurs and speculators.

Interest Rate Swaps

Learning about derivatives is one of the most important lessons to learn, for anyone making new forays into investment finance. But when you have a derivative option on the shares of this company, you are basically holding a financial instrument that has no intrinsic value of its own. Arbitrage profit opportunities are those opportunities that allow for risk-free, zero net investment profits, by capitalizing on price differentials on the same commodity in different markets. For many, what they invest in these instruments are their savings so you can only imagine the impact.

Many investors fail to understand that investing in them means indulging in a kind of leveraging. Forwards contracts are over-the-counter contracts that usually trade on commodities. The term futures encompasses all things like foreign exchange futures and stock index futures as well

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Aaron French

Aaron French

Sports betting can seem confusing or complicated for beginners. If you keep these sports betting basics in mind, then you're well on your way to making the money you want. Remember to ease your way into online betting. Doing your research and having patience will pay off for you down the line.
Aaron French

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Nevada sports betting could be a $5 billion industry

Aaron French

Aaron French

Sports betting can seem confusing or complicated for beginners. If you keep these sports betting basics in mind, then you're well on your way to making the money you want. Remember to ease your way into online betting. Doing your research and having patience will pay off for you down the line.
Aaron French

It’s growing and growing and growing, and it’s going to get bigger.”. MGM Resorts, one of the last to make an impression on the market, is set to roll out a phone app later this month. He co-hosts “The Las Vegas Sportsline” weekdays at 2 p.m. Even without it, book director Jay Rood said, “We’re ahead of last year on handle by 5 or 6 percent, so it continues to be strong.”

“People started to bet more because they could bet on their phone,” Holt said. The Westgate unveiled a phone app Jan. “There is more access to everything, and I think the mobile app is the catalyst.”

It’s tough to find a book without a mobile app. But that trend has reversed. State gaming laws are being loosened to help pump up the handle, with entity betting being one progressive example.

Times have changed in many eye-opening ways in the past five years, and, of course, since the ’70s.

Las Vegas Review-Journal sports betting columnist Matt Youmans can be reached at myoumans@reviewjournal.com or 702-387-2907. CG Technology executives lobbied lawmakers and worked with the Gaming Control Board to get the bill passed, and the entity concept is expected to flourish for football season in the fall.

In the late 1970s, as Jimmy Vaccaro tells the story, there were times when ticket writers in Strip sports books would fall asleep behind the counter because there was so little action. “It’s a way for people outside of the state to get involved.”

Kornegay added, “Just the popularity of sports betting, the entertainment value is second to none.”

Make no mistake, offshore books such as Pinnacle Sports in Curacao and BetCRIS in Costa Rica are still doing business on American soil, but the passage and enforcement of federal online anti-gambling laws have made it more difficult for the Average Joe to wager with a credit card in recent years. It’s a cheap date,” Vaccaro said. CG Technology and William Hill sports books led the way with mobile phone apps that changed the game when introduced five years ago.

On many days, Vaccaro said, 40 percent of what is wagered with the South Point comes in on phone accounts. The Nevada handle of $2.4 billion in 1995 remained flat for more than a decade while offshore books owned the market.

Mobile phone apps and increased mainstream media coverage of sports betting are two major parts of the equation.

He’s not exaggerating, either. A record $132.5 million was wagered in the state on Super Bowl 50 — up from $98.9 million three years ago. “Las Vegas betting is stronger than ever. The sports betting handle in Nevada was $2.4 billion in 2006. It topped $3 billion for the first time in 2012, escalated to $4.2 billion last year and is projected to approach $5 billion in 2016.

“I’ve seen from studies around the world that the mobile app builds business, there’s no question about it,” said Michael “Roxy” Roxborough, an oddsmaker who founded and operated Las Vegas Sports Consultants from 1982 to 1999. “But there is no one set reason the handle is going up.”

Advances in technology have helped the state catch up. On any given day, Twitter is flooded with sports betting-related posts, helping to attract younger bettors. each year. College basketball was a spectacular draw, too, with the 67-game NCAA Tournament pulling in an estimated $200 million in March and April. And that was Super Bowl week.

Mobile apps, mainstream and social media interest, the expansion of in-game and proposition wagering, fantasy sports’ popularity, Las Vegas book upgrades, laws that caused a slight shift away from offshore wagering, and various economic and societal factors are creating a perfect storm surge for legal sports wagering in Nevada.

From his spot behind the counter at the South Point sports book, he watched amusement park-like lines form at each open window. There are a lot of moving parts contributing to what we’re seeing.”

“I’m just flabbergasted,” Vaccaro said. “People can’t get enough of it. “The world is so (bleeped) up, this is a great relief for three hours.”

“You go to these places for the Super Bowl and Final Four,” Roxborough said, “and it’s a very skewed demographic for people in their 20s.”

“We have a pretty sports-passionate culture,” Lawton said.

“In the long run, it could revolutionize sports betting in the state,” Holt said. A month after the Super Bowl brought a crush of customers, the first four days of the NCAA Tournament did the same.

“You are seeing a majority of locals betting on phone apps, and they come to your casino to watch the games. You see them drinking Coronas all day,” Vaccaro said. The Westgate recently poured more than $12 million into the installation of state-of-the-art video boards and a renovated book, and Station Casinos spent millions on new video boards at Red Rock Resort.

Offshore and underground bookmakers still dominate the action, with an estimated $400 billion bet illegally on sports in the U.S. Ten years ago, nobody cared about betting in Las Vegas.”

In the late 1990s, Roxborough said, casinos were plotting to downsize sports books. But Nevada is gaining ground and significance, and a handle approaching $5 billion (with a win percentage in the 5.5 range) is no small thing to bookmakers and casino operators.

“The way things are trending, it’s possible,” Michael Lawton, senior research analyst for the Gaming Control Board, said of the $5 billion figure. It adds up to free advertising.

The biggest events are booming. Follow on Twitter: @mattyoumans247

“The mobile app is just so popular,” Westgate sports book director Jay Kornegay said “The counter handle has not suffered, either.”

Last summer, Senate Bill 443 was signed into a law, authorizing business entities in Nevada to place wagers on behalf of investors from around the world. on ESPN Radio (1100 AM). 19, and it has boosted the book’s handle instead of cannibalizing counter business.

Kornegay, Rood and Vaccaro have appeared on ESPN “SportsCenter” spots in the past year, televised signs of increased mainstream media coverage in all forums. Vaccaro has seen almost everything there is to see during four decades as a Las Vegas bookmaker. “On a macro level, the sports betting industry in Nevada never has been stronger. “That made everyone else get an app, too, because they wanted to be competitive.”

At the South Point, Vaccaro said, around 100 customers signed up for the mobile app during the NCAA Tournament, and the book’s tournament handle was up about $1.2 million over 2015.

“Every single big event has gone up, with record-breaking handles every year,” said Matthew Holt, vice president of CG Technology sports books. A year ago, boxing’s megafight between Floyd Mayweather Jr. and Manny Pacquiao generated an estimated handle of $80 million in the state.

But there are simple theories, too.

Bookmakers all over the city are getting noticeably more aggressive in beefing up betting menus — even on baseball, golf, hockey and mixed martial arts — to create a more competitive market. Still, he was blown away in February, and then blown away again in March.

“There are more women than I’ve ever seen, and they know the money line is different from the point spread