What is a mini size Dow option?
A mini-sized (or “mini” or “E-mini”) dow option is a type of index option contract whose underlying asset is the E-Mini Dow Jones Industrial Average (DJIA) futures contract. The underlying E-mini Dow is valued at 1/5 the value of DJIA with a tick size of $ 5. Dow Mini Options are traded electronically through the Chicago Mercantile Exchange (CME) Globex system.
Futures and options mini-sized contracts make trading indexes more practical and are also present in a wide range of other indices such as Nasdaq 100, S & P 500, S & P MidCap 400 and Russell 2000, as well as commodities such as gold and currencies. Euro etc.
- The mini-sized Dow option controls one underlying E-Mini Dow futures contract.
- Each of the underlying futures contracts moves in increments of 1 point, worth $ 5.
- The premium to buy a mini-sized Dow option is the price of the option multiplied by a $ 5 multiplier.
Understand the mini-sized Dow option
Mini futures and options contracts allow investors to fine-tune their exposure and position size because the cost of these mini-sized commodities is lower than standard futures contracts. Each one-point transfer on an E-mini Dow futures contract is worth $ 5. Options traders have this in mind regarding position deltas.
A delta of -1 for put options or +1 for call options indicates that the option moves by index and point of the underlying asset. As the delta moves towards zero, options contracts may not move, even if the underlying futures contract moves $ 5 per point.
The Dow Jones Industrial Average E-mini option is an American-style option that can be exercised at any time before it expires. When you exercise the option, the corresponding position in the underlying cash settlement E-mini futures contract will be delivered “physically”.
Each mini-sized Dow option manages one underlying E-Mini Dow futures contract.
As of 2020, the E-mini Dow Jones contract is Globex’s third most popular mini contract, second only to the second-placed Nasdaq 100 E-mini and the most popular S & P 500 E-mini in volume. .. The E-mini Dow option has a relatively low daily trading volume compared to other indexes.
Mini-sized Dow options are traded on the symbol OYM and Dow mini futures are traded on the ticker YMM. It expires in March, June, September and December. Trading of options closes at 9:30 AM Eastern Standard Time on the third Friday of the contract month.
E-Mini Dow Option Price
The price of the mini-sized Dow option is the estimated price multiplied by a multiplier. So if the quoted price of the option is 300, the price of the option is 300 x 5, or $ 1,500. This is a premium paid for options. The premium paid is the most common option the buyer (call or put) may lose. Those who buy underlying futures face a loss of $ 5 per point. This can be significantly higher than the fixed loss of Option Premium.
If the price of the underlying asset index exceeds the strike price plus the option price, you will benefit from the E-mini Dowcall option. For example, if the strike price of an option is 26,000 and the option price is 800, a trader will make a profit if the underlying asset index exceeds 26,800.
For put options, using the same numbers, traders start making money when the index falls below the strike minus the premium. In this case, it’s between 26,000 and 800, or 25,200.
Example of mini-sized Dow options trading
Suppose the underlying E-mini Dow futures that expire in June are trading at 25,648. Currently in mid-May, traders expect the underlying asset, E-mini Dow futures, to be significantly higher next month.
They purchase option contracts for the underlying asset at an exercise price of 25,650. The option price is 400 multiplied by $ 5, with a total premium cost of $ 2,000 (including fees).
To reach the break-even point in a trade, you need to raise the foundation to 26,050 (25,650 + 400).
- At the end of June, if the underlying futures contract falls below 25,650 (strike price), the call option expires worthless and the trader loses the $ 2,000 paid for the option (but not more).
- If the underlying asset is between 25,650 and 26,050 at maturity, the option is included in the money, but the transaction still results in an overall loss. The closer your underlying assets are to 25,650, the more you will lose out of $ 2,000. If the underlying assets are 26,050 at the time of expiration, they are the break-even point.
- For every point over 26,050, the trader earns $ 5 per point.Therefore, if the underlying asset is 27,000 at maturity, the buyer of the option call
$ 4,750 = ((27,000-26,050) x $ 5).
Calculate it differently, multiply the maturity value minus the strike price by $ 5, and then deduct the cost of the option.
27,000-25,650 = 1,350 x $ 5 = $ 6,750- $ 2,000 = $ 4,750.