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Dollar Index
Option Price
The dollar index futures price and the dollar index option price is not the same thing. Option
price valuation is not as straightforward as futures valuation. Option premium is comprised of intrinsic value and extrinsic
value.
An option has intrinsic value if
the market is trading above the strike price of a call option, or below the strike price of a put option. If an option contract
has intrinsic value it is called “in the money.” If an option contract does not have intrinsic value it is called
“out of the money.”
For example:
If the dollar index is at $85.300, an $86.300 call option is $1.00 in the money so the intrinsic value of
the option is $1,000.
The
extrinsic value of the option is its “time value.” Extrinsic value takes into account the possibility that an
option may go in the money by expiration. The more time that an option has, the more extrinsic value it has. As an option
approaches its expiration date, it loses value. This is called time decay. At expiration, an option has no extrinsic value
so if the option is out of the money it expires worthless.
Dollar index option prices do not move in tandem with futures prices. A $1 move in your
favor in the dollar index futures markets does not necessarily equal to a $1 increase in the dollar index option value. The
amount that an option value will increase based upon an increase in its futures price is called its delta. Call option deltas
are measures from 0 to 1. As an option goes from “out of the money” to “in the money” its delta increases.
For example:
If a dollar index call option
has a delta of .5 and the price of the dollar index futures market increases by $1 the value of the option will increase by
$.5 or $500.00.
If you are
a speculator with a limited amount of risk capital then dollar index options may be the best way for you to invest in
the dollar index market.
Click here to view the current price of dollar
index options.
Click here to contact a commodities broker with experience in the USD Index market.
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