Customer Advantage of trading CBOT Dow
Jones Industrial AverageSM Options on Futures and CBOT mini-sized DowSM
Options on Futures vs. trading Options on Diamonds and Options on the
DJX cash index.
Dow Futures Margins
The futures industry has seen spectacular growth in options in recent
years. Unlike options traded on securities, futures portfolio margining
recognizes the unique risk aspects of options, and is structured to
calculate the risk for all options, both long and short. In cases where
the premium value of an option is greater than its risk, the excess can
be applied toward other risk requirements in the portfolio, thereby
reducing the overall requirement. In addition, a risk requirement is
calculated on a long option in order to determine how much of that
option's value is not at risk. You do not have this benefit when
trading options on the Diamonds and DJX index.
Trading Hours: Currently, options on the Diamonds and options on the
DJX trade only during U.S. business hours. In comparison, Options on
the CBOT Dow Jones Industrial Average and CBOT mini-sized Dow are
traded nearly 24 hours a day, Sunday through Friday.
Options on the CBOT Dow Jones Industrial Average are ten times the size
of the options on the Diamonds and ten times the size of DJX options.
Options on the CBOT mini-sized Dow are five times the size of the
options on diamonds and five times the size of DJX options. Therefore,
it is potentially cheaper for a customer to trade CBOT Dow Jones
Industrial Average and CBOT mini-sized Dow options. Basically, trading
one CBOT Dow Jones Industrial Average option is equivalent to trading
ten of the comparative products while trading one CBOT mini-sized Dow
option is equivalent to trading five of the comparative products.
Trading options on the CBOT Dow Jones Industrial Average futures and
CBOT mini-sized Dow futures provide a potential advantage when
exercising the options contract. In order to have similar values and
exposures, you must compare 1 CBOT DJIASM futures option contract to 10
Diamond option contracts and 1 CBOT mini-sized Dow options to 5 diamond
option contracts. One CBOT DJIA futures option is ten times the size of
the comparative product while one CBOT mini-sized Dow futures option is
five times the size of comparative products. Upon exercise, the initial
margin required for the CBOT DJIA futures contract is $5,400 and for
the CBOT mini-sized Dow futures contract, $2,700. In comparison,
exercising the Diamond option contracts will require far larger amounts
of margin, usually 50% of the underlying. With the Diamond trading at
80, you would need $40,000 in margin versus $5,400/$2,700 on the
futures contract. This can be a significant factor when planning your
Trading options on the CBOT DJIA and CBOT mini-sized Dow
futures contracts should provide an additional tax advantage
over trading options on the Diamond.* Options traded on
the CBOT DowSM products are treated as futures contracts
and therefore have an inherent tax advantage over the
comparative product. Options on the CBOT Dow products
fall under the 60/40-tax treatment rule (long/short ?
section 1256) for short term trading.
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