May 2012

CME Group fprice discovemuch more who would bis conveyed interest (OI) Much value ithere are maincluding calmonths as information outright price Because thishas develospecifically tointerest ratexpanded coareas such aThis article understandin Support &preponderanparticular stthis may beresistance is A “support” market pricein some forcthis may repmight not rethe oppositeat which sellthrough whiAs a generaonce broken,once broken, Out-of-the-mactively thanto look to loas a possiblmarket. Simout-of-the-mresistance le Puts, of courprice. Thus,strike price,market migha put at a pthat support the right to bof a call sug

2

futures and ery function. implicit infobut look. In psimply by stu in CME Grou

is implied in any differentl and put opwell as s

incorporatese elements.

s informationped a neo profile OI ie options. overage of as commoditis intended tng the signific

& Resistance of openrike price le

e indicative o expected at

level represees, at which bce and backspresent a leveadily break.

e – a price aling interest ch the markal rule, tech, support bec, resistance b

money option in-the-monow-struck, oue indicator omilarly, we t

money calls vels above cu

rse, represen, if one purc this implie

ht break throparticular stri may hold atbuy at a fixedgests an exp

options serv But these mormational vparticular, muudying the pup option mar

option OI pat option serieptions, a varitrike prices directional,

is so valuabw online n the contex We havethe tool to ties, FX and to provide a cance and us

ce Levels n interest isevel in the oof a belief t or near that

ents a price,buyers are exstop the marel through wh A “resistanbove currentis expected tket might nohnical traderscomes resistabecomes supp

ons tend toey options.

ut-of-the-monof support leend to look as possibly

urrent marke

nt the right tochases a put s an expectugh that levke suggests t that level. d price. Thus

pectation that

e an importamarkets convvalue for thouch informatiatterns of oprkets.

atterns becaues are availaiety of contra. Thus, t temporal a

ble, CME Grotool designt of CME Gro

e subsequenother produ

stock indexe foundation e of this tool

– When s found at option markehat support level.

, below currexpected to enrket. As suchich the markce” level is jut market pricto coalesce aot readily rals believe thance. Similarport.

o trade mo Thus, we teney put optioevels below tto high-struc

y indicative et prices.

o sell at a fix at a particutation that tel. The salean expectati

Calls represes, the purchat resistance w

Profi

ant vey ose ion

pen

use ble act the and

oup ned oup ntly uct es. for .

a a ets,

or

ent ter ch, ket ust ces and lly. at, rly,

ore end ons the ck, of

xed ular the of ion ent ase will

be brokthat re

E.g., tU.S. dorecent debt crbreakoexpreswhich wof 1.26were lUSD.

Thus, win the 2011. itself aabove

1.24

1.26

1.28

1.30

1.32

1.34

1.36

2,0

4,0

6,0

8,0

10,0

12,0

Ope

n In

tere

st in

Con

trac

ts

iling Op

ken; the saleesistance mig

he exchangeollar has com weeks as a risis and the

out of Eurozsed in the cwere trendin627 on Januaooking for s

we observed 1.25 EUR/US We furtherafter putting 1.25 on Jan

12/1

/11

12/8

/11

12/1

5/11

CME Ma

Suppo

Source: CME R

0

000

000

000

000

000

000

0.90

00.

990

1.13

01

155

CME M

Source: CME R

ption O

Pag

e of a call sught hold.

e rate betweme under con result of thee prospect of zone nationscontext of Cg down to rery 13, 2012.

support at a

a preponderSD put optior note that th in that low

nuary 13. C

12/2

2/11

12/2

9/11

ar-12 EUR/U

ort @ 1.25?

Research & Produ

1.15

51.

175

1.19

51.

215

1.23

5

Strike

Mar-12 EUR/(January 13,

Research & Prod

Open Int

ge 1 of 4

ggests an exp

en the Euro nsiderable pree European sf default or ms. This preME EUR/USDeach an intra Many option value of €

rance of openons as of Janhe EUR/USD

w of 1.2627 ertainly an e

1/5/

12

1/12

/12

1/19

/12

USD Futures

uct Development

1.25

51.

275

1.29

51.

315

1.33

5

Price

/USD Put OI 2012)

uct Development

terest

pectation

and the essure in sovereign monetary essure is D futures a-day low n traders 1.25 per

n interest nuary 13, reversed and just

easing of

1/26

/12

s

t

1.35

51.

375

1.39

5

I

t

May 2012

European ecBut the lownonetheless. What is signinothing butnumbers” anumber. Siinterest accuwell, anothetraders mighshould be br E.g., CBOT Min a channelNote that, ooptions carinterest, a leby reference

By late Janrunning on tof January 2range for theat least throseems to bgreatest prewas found. Delta Hedgconsider thehedging actiwhich optionusing futuresdelta.

1 Federal Res

126

127

128

129

130

131

132

133

10/3

/11

10/1

0/11

10/1

7/11

CBO

Source

2

conomic tenws were fou

ificant about t many tradand 1.25 rimilarly, we oumulating inr nice, round

ht expect furteached.

March 2012 Tl low at 128

of all the avarried the gevel at which to our candl

nuary 2012, the strength 25th that it ee federal fundough late 201e testing thponderance

ging Implicae possible privity. Delta risk exposurs in a propor

serve Press Re

10/1

7/11

10/2

4/11

10/3

1/11

11/7

/11

11/1

4/11

11/2

1/11

OT Mar-12 1

Su

e: CME Research

sions drove nd just a b

the value of ders see varepresents aobserved som the 1.20 s

d number at her support i

Ten-year T-n-20 on Deceailable puts, reatest amo

h one can seeestick chart.

the marketof the Fed’s

expects to “kds rate at 0 t14.” 1 As suhe 132 levelof call option

ations – Wericing implica hedging is re may be hertion dictated

elease (January

11/2

1/11

11/2

8/11

12/5

/11

12/1

2/11

12/1

9/11

12/2

6/11

10-Yr Note F

upport @ 129?

Resis

h & Product Deve

this reversbit above 1.

1.25? Perhaalue in “roua nice, roume sizable opstrike prices which techniif the 1.25 lev

ote futures pember 2, 201the 129-struount of ope some supp

t was off a announcemekeep the targto ¼ percent

uch, the mark at which tn open intere

e might furthations of dea process p

edged or laid d by the opti

y 25, 2011).

12/2

6/11

1/2/

121/

9/12

1/16

/12

1/23

/12

Futures

stance @ 132?

elopment

Profi

sal. .25

aps und und pen

as cal vel

put 11. uck pen ort

and ent get t … ket the est

her elta per off ion

E.g., ato 0.50half asfuturesdelta o50 futu

Sometior resisopen inare geoption rising open inresistavolatilitfuturesprovide E.g., cat-the-with approasmall gamma

2 Note

respeof coThat as meas exmonerespehedgethe gtermstransa“explo

1/30

/12

5,10,15,20,25,30,35,40,45,

Ope

n In

tere

st in

Con

trac

ts

iling Op

n at-the-mon0 which imps responsive s market. Ifof 0.50, the pures.

imes delta hstance near snterest and enerally “lon contracts whvolatility, thnterest are mnce. When dty,” i.e., cars positions, te support or

consider the -money calls50 long fu

aches, delta bunderlying pa. Thus,

that these ge

ect to at- or nourse, characteis because theeasured by gam

xpiration approey options whect to in- or ouers with at- or greatest need s of both factions. Thisoding gamma”

0000000000000000000000000000

120

121

122

CBOT Ma

Source: CME R

ption O

Pag

ney option wlies that the as movemenf one were lposition may

hedging activstrikes carryisometimes n

ng volatility,”hose premiu

hen strikes pmore likely tdelta hedgersrrying short ohose strikes resistance. 2

delta hedges with a -0.5utures. Asbecomes incprice changethe hedge b

neralizations a

near-to-the-moerized by delte at-money demmas. Furth

oaches with reshile gamma ut-of-the-mone near-the-monto re-adjust tfrequency ans is sometim” effect.

123

124

125

126

127

Strike P

ar-12 10-Yr(1/23/1

CallsResearch & Produ

Open Int

ge 2 of 4

will have a dee premium isnts in the unong 100 call be hedged b

vity providesing a large amnot. If delta ” i.e., carryms are suppprices carryito provide sus are generaloptions vs. o may be less 2

er carrying 150 delta ands option ereasingly senes, as measbecomes less

apply most reloney options was hovering neltas are most er, gamma tenspect to at- or tends to dec

ey options. Tney options typtheir hedge pond the size es referred t

128

129

130

131

132

Price

r Note Optio12)

Putsuct Development

terest

elta close s roughly nderlying ls with a by selling

s support mount of hedgers

ying long ported by ng large

upport or lly “short offsetting likely to

00 short d hedged xpiration nsitive to sured by s stable,

iably with which are, near 0.50. unstable, nds to rise near-the-cline with hus, delta

pically find ositions in

of their to as the

133

134

135

on OI

t

May 2012

requiring mocorrect balanmoney optioprice. So as the strike, the odelta gravitahedger may as the underthe option gincreasingly buy additiona Thus, the decompelled tdeclines andadvances. momentum, strike price. E.g., considethe-money c50 short fuapproaches, small movemmeasured byunstable, remaintain thexacerbated their strike o

Delta He

Long calshort futShort calong futuLong pulong futuShort pushort fut

Alternatively, long calls or punderlying m

position will ben

As the undeprice, the oincreases. Tportion of thmarket. Or hedger maymarket. In

2

ore frequent nce. This effens hovering

underlying moption goes ates toward sell futures trlying marketgoes in-the-negative. Tal futures to

elta hedger hto sell mored buy moreThis may t

pushing fut

er the delta hcalls with a 0tures contra delta becomments in the y gamma.

equiring morhe correct for at-the-mor exercise pr

Adjusting a

edge MAd

lls & tures Sel

lls & ures Buy

ts & ures Sel

uts & tures Buy

Na delta hedger wuts may elect no

market advances onefit from the “lo

option

erlying markeption goes oThus, the dee hedge by bif the markety sell more either case,

adjustment ect is maximnear their st

market decliout-of-the-ms zero. Thto maintain at advances abmoney and

Thus, the delmaintain bala

holding shorte futures ae futures aend to exacures prices

hedger carryin0.50 delta ancts. As op

mes increasingunderlying fuThus, the h

re frequent balance. T

money optionsrice.

a Delta Hedg

Market vances

l futures

y futures

l futures

y futures

Notes who is “long volatot to adjust the dor declines to theong convexity” as positions.

et declines bout-of-the-moelta hedger mbuying futuret were to adv futures in these actions

to maintainized for at-thrike or exerc

nes below tmoney and thus, the dea balance. Obove the strikdelta becomta hedger mance.

t call optionsas the markas the markcerbate markaway from t

ng 100 long nd hedged wption expiratigly sensitive utures price, hedge becomadjustment This effect s hovering ne

ge

Market Declines

Buy futures

Sell futures

Buy futures

Sell futures

tility,” i.e, holdindelta hedge as the extent that thessociated with lo

elow the stroney and demay liquidatees in a declinivance, the de

an advancis to maintain

Profi

n a he-ise

the the elta Or, ke,

mes may

s is ket ket ket the

at-with ion to as

mes to is

ear

g he e ong

ike elta e a ing elta ing n a

balancestabilizvicinity Of coua prepoissue imay bincludinmortgaover-thbelieveshed so Pin Risassociaor out-or abanexacerthe strof open Tensionmarketopen inmay bemay dsignific Tradersabout numbecalls sexpiratadvancoption contracfuturesexercisuncove Sometiadvant“pinnedby sellstrike pfrom tliquidatrespect Just autilizedmay bemay bactivityrelatedoption

iling Op

ed delta hezing the may of the strike

rse, it is not onderance ofs complicate

be operating ng cash age backed she-counter e that an opome light on

isk – Pin riskated with wh-of-the-monendoned, resprbated when rike price of on interest.

ns may mount is hoveringnterest as exe expressed

drive significacant market v

s carrying pin risk ma

er of ways. struck closetion approacce above the (or anticipct rules dics contract qse and avoered long futu

imes optiotage of a d” to a strikeing both put price. But ifthe pinned lete by buytively.

s the optiond to identify se useful in p

be expressedy may exert d futures pric as well as fu

ption O

Pag

edge may hrket and “pie price.

easy to idenf long or shored by the fac across variTreasuries,

security (MBS(OTC) instruption open in this issue.

k is a referenether or not

ey, and thus pectively, at ethe market

options that

nt among optg near a st

xpiration apprin a flurry ofant price mvolatility.

option positay address Consider a

e to currentches. If strike price,

pate an autctate) and quickly to looid the risk ures position

n traders situation whe price by se and call optif the market evel, these t

ying back t

n open intesupport and predicting wh in these or an impact ucing and, theutures traders

Open Int

ge 3 of 4

have the iminning” it w

ntify whetherrt delta hedgct that delta ous related

Treasury S) positions auments. Snterest tool

nce to the unan option malikely to be eexpiration. Pis trading atcarry a large

tion traders wrike with suroaches. Thisf market actiovement or

tions and cotheir concer

a trader whot market lethe market he may exetomatic exesell the un

ock-in the p exposure .

attempt there the melling a stradions at that p should rally traders mighthe calls o

erest profile resistance, it

hether or notr other waysupon both operefore, is res.

terest

mpact of ithin the

r there is ers. The hedgers markets futures,

and other Still, we will help

certainty ay be in- exercised Pin risk is t or near e amount

when the ubstantial s tension ivity that perhaps

oncerned rns in a o is long evels as t should ercise the rcise as nderlying profit on with an

to take market is ddle, i.e., particular or break

ht act to or puts,

may be t likewise t pin risk s. Such ption and levant to

May 2012

New Onlinenew online “Ofocuses on oequity indexusers with thof choice, pu We believe monitoring potentially information. be accessed Interest Equities: FX: www Agricultu Energy: Metals: w Concluding in a study particular, tpossible levpossible streThis data ma Copyright 201are a leveraged amount of monetheir lifestyles. trade. All examinvestment advi CME Group is a Chicago Mercantrademark of the The informationspecific situationexamples contaior the results ofby official CME,

2

e Tool – CMOptions Openur products,

xes and commhe flexibility tuts vs. calls, d

that this toopen interes

providing The Option at: Rates: www. www.cmegr

w.cmegroup.cure: www.cmwww.cmegrowww.cmegro

Note – Useof option othis data mvels of supength of sucay further pr

2 CME Group A investment, andey deposited for And only a port

mples in this brce or the results

trademark of Ctile Exchange Ine New York Merc

within this docns of any recipiened herein are h

f actual market eNYMEX and CBO

ME Group han Interest Pro including intmodities. Theto focus on sdates, etc.

ool is extremst trends a

importanns Open Inte

cmegroup.coroup.com/eqocom/fxoptionsegroup.com/

oup.com/enerup.com/meta

eful informatipen interest may provideport and rch support arovide a poss

All Rights Reserd because only a a futures positiotion of those furochure are hyp of actual marke

CME Group Inc. Tnc. Chicago Boarcantile Exchange,

cument has beenents of the informhypothetical situaexperience. All mT rules. Curren

as developedofile” tool wherest rates, Fe tool providspecific marke

mely useful nd tendenciet actiona

erest Profile c

om/iroptionsooptionsoi soi agoptionsoi rgyoi alsoi

on is convey patterns. e insight inresistance; tand resistancsible warning

rved. Futures traa percentage of on. Therefore, trnds should be dothetical situatiot experience.”

The Globe logo, rd of Trade is a , Inc.

n compiled by Cmation. CME Groations, used for e

matters pertainingnt CME/CBOT/NYM

Profi

d a ich FX, des ets

in es, ble can

oi

yed In

nto the ce. of

volatilitas exp For mo David RInteres312-64 MichaeInteres312-46 Lori AldResear312-93 SandraResear011 (4 John WResear312-46

ading is not suita contract’s valuraders should ondevoted to any ons, used for e

E-mini, Globex, trademark of th

CME Group for goup assumes no explanation purpg to rules and spMEX rules should

iling Op

ty that may iration appro

ore informatio

Reif, Associatst Rate Produ48-3839, Dav

el Kamradt, Dst Rate Produ66-7473, mik

dinger, Assocrch & Product30-2337, lori

a Ro, Directorrch & Product4) 203-379-3

W. Labuszewsrch & Product66-7469, jlab

table for all invesue is required tonly use funds thaone trade becau

explanation purp

CME and Chicahe Board of Trad

general purposes responsibility fo

poses only, and specifications hered be consulted in

ption O

Pag

be manifest oaches.

on, please co

te Director ucts vid.Reif@cme

Director ucts ke.kamradt@

ciate Directort Developmen.aldinger@cm

r t Developmen3789, sandra

ski, Managingt Developmenb@cmegroup.

stors, and involvo trade, it is posat they can affouse they cannotposes only, and

ago Mercantile Exde of the City of

s only and has or any errors or should not be coein are made subn all cases before

Open Int

ge 4 of 4

as a result o

ontact …

egroup.com

cmegroup.co

r nt megroup.com

nt a.ro@cmegro

g Director nt .com

ves the risk of losible to lose mord to lose withot expect to prof should not be

xchange are traf Chicago, Inc. N

not taken into a omissions. Addi

onsidered investmbject to and are e taking any actio

terest

f pin risk

om

m

up.com

oss. Futures re than the ut affecting it on every considered

demarks of NYMEX is a

account the itionally, all ment advice superseded on.