Understanding Index Options

Picture below is the at the money call market for the XJO option series.

Now I know that the notional value is 1 point = $10 so in this example the contract value is 58,650

I don't understand the bid/offer. If I want to buy 1 contract XJOM27 (which I assume is June) how much will it cost me. 94c? $940? How do I know?

kid hustlr said:

Picture below is the at the money call market for the XJO option series.

Now I know that the notional value is 1 point = $10 so in this example the contract value is 58,650

I don't understand the bid/offer. If I want to buy 1 contract XJOM27 (which I assume is June) how much will it cost me. 94c? $940? How do I know?View attachment 71018

Click to expand...

The price representation shown on your screenshot is a little strange, the actual quotes on the series you mentioned are 94/97. If you hit the ask ; 97 X 10 = $970 per contract plus fees.

Link to XJO Options Fact Sheet.

http://www.asx.com.au/documents/resources/index_options.pdf

cutz said:

The price representation shown on your screenshot is a little strange, the actual quotes on the series you mentioned are 94/97. If you hit the ask ; 97 X 10 = $970 per contract plus fees.

Click to expand...

That's what I thought so they are represented in multiple of 100?

Ok,

Next question.

I have a stock portfolio of XYZ. This is a long term buy and hold portfolio which will track the index pretty close over time.

What are the upside/downside to selling call options over this portfolio? Are there any studies out there about long term returns using such a method?

kid hustlr said:

What are the upside/downside to selling call options over this portfolio? Are there any studies out there about long term returns using such a method?

Click to expand...

Downside caps profit on strong uptrend

Upside reduces draw down on down trend / flat

minwa said:

Downside caps profit on strong uptrend

Upside reduces draw down on down trend / flat

View attachment 71020

Click to expand...

Glad you commented Minwa - hoping you would.

Those results look pretty good - admittedly a quiteish slow grind mkt lends itself to this strategy doing ok.

Should this be standard for all long term, passive index type investors to sell calls over the top of their portfolio?

Put it another way - if your grandma has 2m in mkt ETF's and was looking to boost returns over a long term horizon, would a sell call strategy lead to increased returns?

kid hustlr said:

Should this be standard for all long term, passive index type investors to sell calls over the top of their portfolio?

Put it another way - if your grandma has 2m in mkt ETF's and was looking to boost returns over a long term horizon, would a sell call strategy lead to increased returns?

Click to expand...

Yes there is clear favor in selling calls over the long run in general if you can stick to it. Most people just get in their own way fancying around.

kid hustlr said:

That's what I thought so they are represented in multiple of 100?

Ok,

Next question.

I have a stock portfolio of XYZ. This is a long term buy and hold portfolio which will track the index pretty close over time.

What are the upside/downside to selling call options over this portfolio? Are there any studies out there about long term returns using such a method?

Click to expand...

DYOR not advice

Look at the past and the present and see which strategy is better for you

In my opinion It all comes down to implied volatility and actual volatility.

Writing options is like writing insurance. If more events happen you get hit, if less you gain.

Some of the studies show that the market overestimates the volatility.

Most participants have a similar risk free rate and dividends in the calculation of option theoretical price.

I had a chart that illustrates it really well, can't find it.. Most of the time actual realised volatility was less than implied volatility.

If a big downward spike comes eg GFC you will lose a massive amount if the option was written before the spike in volatility.Also if there is a massive spike up, you will miss out of the potential gains you would have got in buy and hold.

But during the GFC implied volatility and actual was massive. So if you wrote option during that time you would get a massive premium which volatility eventually fell, so it was a good time to write options. So timing is really important.

Also there is taxation considerations. Sometimes you have to adjust some of the assumptions used in these indices calculations




http://www.betashares.com.au/insights/buy_write_aust_equities/