Dow Jones Industrial Average Index Options

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Contents

Dow Jones Industrial Average

Dow Jones Global: DJIA

Apr 3, 2020, 11:35 a.m.

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    Dow Jones Industrial Average

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    Overview

    Key Data

    • Open 21,285.93
    • Day Range 21,038.53 – 21,447.81
    • 52 Week Range 18,213.65 – 29,568.57

    Performance

    5 Day
    • -2.41%
    1 Month
    • -18.37%
    3 Month
    • -26.26%
    YTD
    • -26.01%
    1 Year
    • -20.10%

    Recent News

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    Live Updates: President Trump Slams 3M, Invokes Defense Production Act

    Here’s what you need to know about the coronavirus outbreak to navigate the markets today.

    Dow’s Loss Grows After Jobs Data

    U.S.nonfarm payrolls shrank by 701,000 jobs in March. Economists had expected a loss of 100,000.

    Fed’s Daly: Ugly jobs data will improve if we fight the pandemic effectively

    The drop in employment and the rise in jobless claims are big numbers but Americans should focus on fighting the virus effectively and then the data will improve, said San Francisco Fed President Mary Daly, in an interview on CNN on Friday. “History tells us that if we fight a global pandemic with the social distancing actions we’ve taken – the sheltering-in-place – then those economies that do that get through that faster,” Daly said. “Those numbers don’t stay big if we do these things well,” she added.

    Kudlow calls banks ‘ready to go’ for small-business lending program

    Fed’s Daly: Job losses won’t stay big if we fight the pandemic effectively

    Dow’s 229-point drop led by losses for shares of UnitedHealth, Walt Disney

    Dow’s 229-point drop led by losses for shares of UnitedHealth, Walt Disney

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    U.S. service sector continued to expand in March but at slower rate, ISM says

    Stocks lower after grim jobs report shows coronavirus clobbering the economy

    FedEx remains in compliance with debt covenants, sees results hurt by increased FedEx Ground demand

    FedEx Corp. said Friday that, including the recent proposed debt offering, it expects to remain in compliance with its debt covenants, but indicated there was risk that it may need to amend the covenants if addtional financing is required and results deteriorate further. The package delivery service said that although it has seen increased demand for its FedEx Ground delivery service in the U.S., as shelter-in-place measures in response to the COVID-19 pandemic has boosted demand for e-commerce, the shift in sales mix is expected to hurt margins and operating results. Results have also been impacted by “significantly weaker global economic conditions” as a result of the COVID-19 pandemic. The company’s current debt covenant requires the ratio of debt to consolidated earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) to be no higher than 3.5 to 1.0; as of Februay 29, that ratio was 2.8 to 1.0. after previously announced borrowings and proposed offerings, FedEx expects to remain in compliance with the debt-ratio covenant. “However, if we secure additional financing or experience a deterioration in results of operations that would cause us not to be in compliance with the covenant, we would have to seek to amend this covenant. No assurances can be made that such amendment would be approved by our lenders,” the company said in a statement. Separately, FedEx said it has implemented temporary surcharges on all international shipments, and has temporarily eliminated its money-back guarantee for all delivery services. The stock, which fell 3.7% in morning trading, has lost 25.6% year to date, while the Dow Jones Transportation Average has dropped 32.4% and the Dow Jones Industrial Average has declined 25.7%.

    Stocks Shrug Off Ugly Jobs Figures

    U.S.nonfarm payrolls shrank by 701,000 jobs in March. Economists had expected a loss of 100,000.

    ISM services index drops to 52.5% in March from 57.3%, well above expectations of 43%

    UnitedHealth, American Express share losses lead Dow’s nearly 75-point drop

    UnitedHealth, American Express share losses lead Dow’s nearly 75-point drop

    Dow Jones Industrial Average Index Options

    DJIA index options are option contracts in which the underlying value is based on the level of the Dow Jones Industrial Average, a price-weight stock market index calculated from the stock prices of 30 of the largest and most widely held public companies in the United States representing the most important industries.

    The Dow Jones Industrial Average index option contract has an underlying value that is equal to 1/100th of the level of the DJIA index. The Dow Jones Industrial Average index option trades under the symbol of DJX and has a contract multiplier of $100.

    The DJX index option is an european style option and may only be exercised on the last business day before expiration.

    Product Name Symbol Underlying Value Contract Multiplier Exercise Style
    Dow Jones Industrial Average Options DJX 1/100th of DJIA $100
    (Full Contract Specs)
    European
    Jumbo-DJX Options DJL 1/10th of DJIA $100
    (Full Contract Specs)
    European

    How to Trade DJIA Index Options

    If you are bullish on the DJIA, you can profit from a rise in its value by buying Dow Jones Industrial Average (DJX) call options. On the other hand, if you believe that the DJIA index is poised to fall, then DJX put options should be purchased instead.

    The following example depict a scenario where you buy a near-money DJX call option in anticipation of a rise in the level of the DJIA index. Note that for simplicity’s sake, transaction costs have not been included in the calculations.

    Example: Buy DJX Call Option (A Bullish Strategy)

    You observed that the current level of the DJIA index is 7,776.18. The DJX is based on 1/100th of the underlying DJIA index and therefore trades at 77.76. A near-month DJX call option with a nearby strike price of 78 is being priced at $5.18. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $518.00.

    Assuming that by option expiration day, the level of the underlying DJIA index has risen by 15% to 8,942.61 and correspondingly, the DJX is now trading at 89.43 since it is based on 1/100th of the underlying DJIA index. With the DJX now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:

    Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier

    So you will receive (89.43 – 78.00) x $100 = $1,142.61 from the option exercise. Deducting the initial premium of $518.00 you paid to buy the call option, your net profit from the long call strategy will come to $624.61.

    Profit on Long DJX 78 Call Option When DJIA at 8,942.61
    Proceeds from Option Exercise = Cash Settlement Amount
    = (Index Settlement Value – Option Strike Price) x Contract Size
    = (89.43 – 78.00) x $100
    = $1,142.61
    Investment = Initial Premium Paid
    = $518.00
    Net Profit = Proceeds from Option Exercise – Investment
    = $1,142.61 – $518.00
    = $624.61
    Return on Investment = Net Profit / Investment
    = 121%

    In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the DJX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

    In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the DJX option sale will still be equal to it’s intrinsic value.

    Limited Downside Risk

    One notable advantage of the long Dow Jones Industrial Average call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the DJX call option.

    Suppose the DJIA index had dropped by 15% instead, pushing the DJX down to 66.10, which is way below the option strike price of 78. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $518.00.

    You May Also Like

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    Buying Straddles into Earnings

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    Writing Puts to Purchase Stocks

    If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

    What are Binary Options and How to Trade Them?

    Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

    Investing in Growth Stocks using LEAPS® options

    If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

    Effect of Dividends on Option Pricing

    Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

    Bull Call Spread: An Alternative to the Covered Call

    As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

    Dividend Capture using Covered Calls

    Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

    Leverage using Calls, Not Margin Calls

    To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

    Day Trading using Options

    Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

    What is the Put Call Ratio and How to Use It

    Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

    Understanding Put-Call Parity

    Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

    Understanding the Greeks

    In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

    Valuing Common Stock using Discounted Cash Flow Analysis

    Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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