1. Options: Basic Definitions “Put” option gives the buyer the right to a short position in the futures market. Seller or writer of the put is assigned a long position IF the option is exercised “Call” option give the buyer the right to a long position in the futures market. Seller or writer of the call is assigned a short position IF the option is exercised

2. Calls and Puts Put Call Sell (Writer)Buy ShortLong Sell (Writer)Buy ShortLong Exercise

3. Definitions “Strike Price” Specific price owner has right to buy or sell “Premium” Cost of buying an option at a particular strike price “In the Money” Put—futures is below strike price “In the Money” Call—futures is above strike price “Intrinsic Value” Difference between the underlying futures and an in the money put or call “Time Value” Difference between options premium and intrinsic value

4. Premiums: Puts and Calls 10/30/01 Cotton: Z01 Futures at 28.92 Cents Per Pound CallsPuts 24.004.93 25.003.97 30.00.35 35.00.05 40.00. 01 24.00 0.02 25.00 0.06 30.00 1.43 35.00 6.12 40.0011.09

5. Premiums: Puts and Calls 10/31/01 Cotton: Z01 Futures at 29.90 Cents Per Pound CallsPuts 24.005.91 25.004.93 30.00.68 35.00.05 40.00. 01 24.00 0.02 25.00 0.04 30.00.78 35.00 5.14 40.0010.11

6. Change in Intrinsic and Time Value: Question Calls Premium Intrinsic Time 24.004.934.92.01 25.003.973.92.05 30.00.35.00.35 35.00.05.00.05 40.00. 01.00.01 10/31 24.005.915.90.01 25.004.934.90.03 30.00.68.00.68 35.00.05.00.05 40.00.01.00.01 Cotton: Z01 Futures at 28.92 Cents Per Pound on 10/30 And 29.90 Cents Per Pound on 10/31 Puts Premium Intrinsic Time 24.00.02 25.00.06 30.00 1.43 35.00 6.12 40.0011.09 10/31 24.00.02 25.00.04 30.00.78 35.00 5.14 40.0010.11

7. Change in Intrinsic and Time Value: Answer Calls Premium Intrinsic Time 24.004.934.92.01 25.003.973.92.05 30.00.35.00.35 35.00.05.00.05 40.00. 01.00.01 10/31 24.005.915.90.01 25.004.934.90.03 30.00.68.00.68 35.00.05.00.05 40.00.01.00.01 Cotton: Z01 Futures at 28.92 Cents Per Pound on 10/30 And 29.90 Cents Per Pound on 10/31 Puts Premium Intrinsic Time 24.00.02.00.02 25.00.06.00.06 30.00 1.43 1.08.35 35.00 6.12 6.08.06 40.0011.09 11.08.01 10/31 24.00.02.00.02 25.00.04.00.04 30.00.78.10.68 35.00 5.14 5.10.04 40.0010.11 10.10.09

8. Intrinsic and Time Value:Call Strike Price (Call) PremiumIntrinsic ValueTime Value 2.60.25.20.05 2.70.16.10.06 2.80.100 2.90.070 3.00.050 Underlying Futures at $2.80

9. Intrinsic and Time Value: Put Strike Price (Put) PremiumIntrinsic ValueTime Value 2.60.050 2.70.070.06 2.80.100 2.90.16.10.06 3.00.25.20.05 Underlying Futures at $2.80

10. Futures and Options: Hedging Differences Futures- Sell ShortOptions - Buy Put Price falls - Gain from futures, no premium Price rises – Gain from cash Price Locked Price falls- Premium deducted from N.S.P. Price rises – Let put expire, collect price differential over premium cost Price not locked on upside

11. Price Falls: Zero Basis Sell $7.00 Futures and Price Falls to $6.50 Gain of $.50 in Futures Loss $.50 in Cash Net selling price $7.00 Buy $7.00 put for $.15 premium and price falls to $6.50. Offset put for $.60 premium Loss of $.50 in cash, gain of $.45 on options Net selling price $6.95 Futures Put

12. Price Rise: Zero Basis Sell $7.00 Futures and Price Rises to $7.50 Gain of $.50 in Cash Loss of $.50 in Futures Net selling price $7.00 Buy $7.00 put for $.15 premium and price rises to $7.50. Let put expire Gain of $.50 in cash market Less $.15 premium Net selling price $7.35 Futures Put

13. Short Hedging: Futures vs. Options

14. Price Rise Greater Than Premium

15. Long Hedging: Futures vs. Options

16. Options: Put Buyer-Seller Choices

17. Options: Call Buyer-Seller Choices

18. Options: Calls- Retrade

19. Options: Calls-Exercising Option

20. Options: Covered Options

21. Writing Covered Puts w/Price Increase

22. Writing Covered Puts w/Price Decrease

23. Writing Covered Calls w/ Price Increase

24. Writing Covered Calls w/Price Decrease

25. Writing Naked Puts w/ Price Increase

26. Writing Naked Puts w/Price Decrease

27. Writing Naked Calls w/Price Increase

28. Writing Naked Calls w/Price Decrease

29. Writing Options: Summary