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Dow Futures and Options Trading


Dow Futures and Options Trading

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.

Commissions
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.

Exercise/Settlement
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 strategies.

Tax Benefits
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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