What price for a put on the FTSE?

[Tunneller]

Hi, sorry if this is a newbie post.

My mom (lives in UK) has some sort of bond that is going to pay out if the FTSE is above 5100 in Sept. She's nervous. I'm recommending her to buy a put to cover any loss. Should be "cheap" because the FTSE's around 5700.

Here's where the problem starts. Her (not-online) broker doesn't do options (!!!??) I (or she) can open an online account with IB, which will require a deposit of $2000 and $10/month fees. Fine. But all of this only makes sense if the put is, indeed, cheap. So I need a quote for the price *without* first having to open an account. Where can I get quotes for UK options online?

Regards, John

 

[garethb]

Hi Tunneller

Before getting prices on put options you need to work out what sort of option you really need. You have not given much detail but I suspect a normal put option will not give you the cover you want.

I am guessing but is this bond something where your mother invested a capital lump sum so that as long as the FTSE is above 5100 at the maturity it pays a generous % interest but if FTSE is below 5100 she gets nothing back? If this is the case you do not want a normal put option as this pays out an increasing amount the further below the strike price you are. What you need is something called a binary option which pays out nothing if FTSE is above 5100 and a lumnp sum if the ftse is below even by 1 point. I don't think there are exchange traded binaries but you might well find a spread betting firm would sell you one although I doubt you could buy a September 5100 binary put on line.

Give us a bit more info on the bond and it will be easier to work out what you need.

Do it by a PM to me if you don't want to give all the info in public forum.


Regards
Gareth

 

[Tunneller]

I am guessing but is this bond something where your mother invested a capital lump sum so that as long as the FTSE is above 5100 at the maturity it pays a generous % interest but if FTSE is below 5100 she gets nothing back?

Exactly. She'll double her money. A binary put would be perfect, but in the absence of such I was musing on, say, sufficiently many Sep 5300's that she covered her money by the time the FTSE hit 5100.

Those puts may not be cheap though. With my US account I can sell naked options too, so I could approximate the binary option by buying some puts above 5100 and selling some puts below 5100. The money I got back from the shorts would help cover the long. I can't see an online broker in the UK letting my mom create an account where she can do that....

In the absence of a UK account, about the only thing I can find in the US, is a thinly traded option on an ETF for FTSE-Eurotop. But then I'd be adding the risk of a good correlation between the UK and Euro markets (in which case I might as well take out puts on the S&P...)

 

[garethb]

The bear spread you descibe (long a put and short a put at a lower price would be a reasonable approximation I guess and you would not be paying for a stack of extra cover a long way below 5100 that you don't need. You might be able to get an idea on price from the daily price output files from Euronext but long dated OTM may be a bit thinly traded to have a price each day. Check the maturity date of the bond relative to options expiry - you wouldn't want to get september options and find that they expire worthless but the bond matures on 30th September by which time the FTSE might have tanked better to open a position with later expiry and close out in the market at the bond maturity date.

http://www.euronext.com/editorial/0,5371,1732_203339043,00.html


I still think a spread betting firm might sell you a binary but if they are not actively quoting on line you may feel that they could stiff you on the price if you want to sell early (they wouldn't stiff you at expiry if FTSE is below the agreed target they would pay up). If you are US resident I don't know if you can open an account but your mother could (unless the idea of something as dodgy sounding as spread betting puts her off).

Best of luck

 

[downbytheriver7]

Unless you don't have much spare cash why don't you simply hedge it with a spreadbet on the index. Simply go short the index at an equivalent amount per point which equals the amount you would stand to make on the bond if it where to close at today's price. Obviously this depends on how linear the profit is on the bond for every point over 5100.

 

[garethb]

Unless you don't have much spare cash why don't you simply hedge it with a spreadbet on the index. Simply go short the index at an equivalent amount per point which equals the amount you would stand to make on the bond if it where to close at today's price. Obviously this depends on how linear the profit is on the bond for every point over 5100.

My impression is that above 5100 the return on this bond is probably not related to the FTSE at all it is just the level below which the bond does not pay out.

Tunneller

Re-reading your bear spread idea, I would suggest that you trade options with strikes as close as possible either side of 5100. This would give you the payoff curve closest to a binary. Euronext/Liffe FTSE options have strikes at xx25 and xx75 values which is not ideal. Most spread betting firms offer 25 point intervals so you could buy 5125 put and sell the 5100. This should give you the cheapest cover since you are not buying unnecessary cover below and very little above 5100. Would be pretty much ideal as long as the expiry/maturity dates match.

The other benefit of your bear spread idea is that whilst September expiries are not very actively traded now (and not quoted on-line by the SB firms yet) by about april they will be more liquid enabling an easier early exit if required. This would not be the case for the binary.

regards

Gareth