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To: count-your-change
Not at all. The difference between options and futures is quite clear (in fact, I wrote a book on this subject in 2003). Especially so when considering the manner in which a large number of capital pools are managed today.

The index specs who are at the root of the energy pricing problem in the US (worldwide, too) right now are using hard-asset-based portfolio theory. Futures, while not hard assets in their own right, are in any case potential assets, and serve as a reasonable proxy for owning, say, 25,000 lbs of physical copper, or 1,000 bbls of WTI crude. As long as a futures contract nearing expiration can be replaced with another futures contract that expires further out, at any given time of the portfolio manager's choice, it's fair to label a futures contract as a hard asset, and treat it as such for analytical purposes.

Options, otoh, are principally only financial assets. Their value is derived only partially from the value of the underlying mkt, and this is all the difference to an asset-backed trader. The price of a pound of copper is X cents; X cents is the asset value of the copper, right? However, we can't say that about an option on a pound of copper, because two components of the option's price are time remaining and implied volatility -- neither of which have anything to do with copper per se -- and thus both these components are disdained by the asset-backed trader.

I don't claim that these attitudes are necessarily sacrosanct, or in numerous cases even reasonable. They are, however, prevalent; they rule the roost in much of portfolio theory today, and so cannot be ignored.

20 posted on 06/06/2008 10:27:44 AM PDT by SAJ
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To: SAJ

Thanks, I should like to read your book as three different people have at least seven different opinions on the subject.


22 posted on 06/06/2008 10:53:28 AM PDT by count-your-change (you don't have to be brilliant, not being stupid is enough.)
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