“The New York Board of Trade sugar and cotton option markets are very active, and in fact, sugar was the first to trade agricultural options back in 1982 (options on Sugar No. 11 futures), so it’s appropriate that our Exchange is adding Options on Futures Spreads contracts,” said Joseph J. O’Neill, NYBOT Senior Vice President. “We developed these exciting new products to serve our growing options marketplace, which in 2004 experienced growth rates of 28%. The growth in options usage is driven by the increasing sophistication of the participants in our markets, and this OFS product is the next step in the evolution and maturation of the NYBOT options marketplace.”
NYBOT developed the OFS contract in response to the rapid growth in options trading at the exchange and the demand for more complex option-based products. Options help traders manage their risk, as well as presenting them with opportunities created by that same volatility.
The options market on sugar futures, the most active commodity options contract at NYBOT, has established new highs in recent months, with open interest hitting a record level of 418,874 contracts on December 1, 2004.
The cotton options market at NYBOT is also very strong, with the 2004 options volume (1,725,982) being 35% of the total futures and options volume for the year (4,882,000). Cotton options open interest historically has often exceeded cotton futures open interest by significant amounts.
Options on Futures Spreads will allow traders to manage a single position instead of two and pay only one premium for that single instrument. Where a regular option contract gives the buyer the right, but not the obligation, to establish a futures position at a pre-determined price level, an OFS gives the buyer the right, but not the obligation, to establish a spread position at a pre-determined spread price between the two futures contract months. An OFS call option contract would give the buyer the right to establish a spread position of long the first futures contract/short the second futures contract. Similarly, an OFS put option would give the buyer the right to establish a spread position of short the first futures contract/long the second futures contract.
The strike price of each option will be the difference between the prices of the two futures contracts. The spread price in an OFS will be the result of subtracting the price of the second delivery month of the underlying futures contract from the price of the first delivery month.
The New York Clearing Corporation (NYCC) has created a SPAN environment on OFS that replicates how SPAN margins regular options. By using the Super Inter-commodity spread feature of SPAN, the NYCC has created an enhancement that provides traders with the appropriate spread offsets for OFS positions, given their position’s particular level of risk.
For more information on Options on Futures Spreads contact Tim Barry at tbarry@nybot.com or 212-748-4096.
The New York Board of Trade (NYBOT) is New York’s original futures exchange, where the world trades food, fiber and financial products. For well over a century, the New York Board of Trade has provided reliability, integrity and security in a global marketplace for cocoa, coffee, cotton, ethanol, orange juice and sugar, as well as currency and index futures and options. Information about the New York Board of Trade can be found at www.nybot.com and www.nybotlive.com.
