QMUL Applied Futures and Options Class notes Week4 10th Feb 2015

Click hereApplied Futures and Options (ECOM064)Visiting Fellow Professor: Gerry PerezSupport staff: Tomasz Mlynowski(Msc Candidate); He will provide support class during the week and is the students main point of contact for any follow-up questions or assistance. t.mlynowski@The aim of this class to to understand electronically exchange traded futures and options. The visiting professor will show live practical online trading examples of a trading interface, prices, and derivatives (in US markets). There are no books assigned to this class, rather we will be referring to websites e.g:•/getting_started/options_overview.html•/education/a-traders-guide-to-futures.html•NOTICE: The mid term date has been set for Tuesday, 17th March 2015 (18:30). Venue: RBC, Bainbridge Room (subject to change). The mid term will cover information relating to lectures and notes up to the 17 February 2015.We will cover….What is market data? Data reflecting current trading information to include pricing and volume and other additional information related to the trade. Market data helps traders and investors learn as much as possible about daily trades. In finance, market data is associated with investment instruments.source: Definition of a tick? The minimum upward or downward movement in the price of a security. The term "tick" also refers to the change in the price of a security from trade to trade. Since 2001, with the advent of decimalisation, the minimum tick size for stocks trading above $1 is 1 cent.The term "tick" is also used in reference to the direction of the price of a stock, with an "uptick" referring to a trade where the transaction has occurred at a price higher than the previous transaction, and a "downtick" referring to a transaction that has occurred at a lower price. In this context, the uptick rule refers to a trading restriction that prohibits short selling, except on an uptick, presumably to alleviate downward pressure on a stock when it is already declining. Source Click hereContinous Markets: A method of transacting different securities orders. Continuous trading involves the immediate execution of orders upon their reception by market makers and specialists.Unlike batch trading, which collects similar orders and executes them all at once, continuous trading entails the immediate placement of orders to market. In the U.S., all trades occur on a continuous basis except at opening.For example, a limit order to sell a security is immediately sent to market and remains there until either the order expires or a buy order with a higher or equal buying price is sent to market. Source Call market: A type of market in which each transaction takes place at predetermined intervals and where all of the bid and ask orders are aggregated and transacted at once. The exchange determines the market clearing price based on the number of bid and ask orders. A call market is contrasted to an auction market, where orders are filled as soon as a buyer/seller is found for any given order at an agreed upon price.In a call market, the price is set by the exchange so the market will clear, or almost clear, every time orders are filled. This is in stark contrast to the auction market, where prices are determined by buyers and sellers.Because the call market groups transactions together, there is a substantial increase in liquidity. Although liquidity is generally considered to be a good quality in any marketplace, sellers may lose some of the liquidity premium, which is can be substantial.Source Trading hours: The period of time when you can trade a product.Pre-trading: A period of trading activity that occurs before the regular market session. The pre-market trading session typically occurs between 8:00 - 9:30 A.M. EST each trading day. Many investors and traders watch the pre-market trading activity to judge the strength and direction of the market in anticipation for the regular trading session.re-market trading activity generally has limited volume and liquidity, and therefore, large bid-ask spreads are common. Many retail brokers offer pre-market trading, but may limit the types of orders that can be used during the pre-market period. Source Click hereOpening Position: In investing, any trade that has been established, or entered, that has yet to be closed with an opposing trade. An open position can exist following a buy (long) position, or a sell (short) position. In either case, the position will remain open until an opposing trade has taken place. For example, an investor who owns 500 shares of a certain stock is said to have an open position in that stock. When the investor sells those 500 shares, the position will be closed.Buy-and-hold investors generally have one or more open positions at any given time. Short-term traders may execute "round-trip" trades; a position is opened and closed within a relatively short period of time. Day traders and scalpers may even open and close a position within a few seconds, trying the catch very small, but frequent, price movements throughout the day. source Closing position: Executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back. The difference between the price at which the position in a security was opened, or initiated, and the price at which it was closed, represents the gross profit or loss on that security position. Taking offsetting positions in swaps is also very common to eliminate exposure prior to maturity. source Witching hour: The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled by large professional traders, program traders and large institutional traders, and can be characterized by higher-than-average volatility. Source Investopedia. comQuote Driven Market: An electronic stock exchange system in which prices are determined from bid and ask quotations made by market makers, dealers or specialists. In a quote driven market, also known as a price driven market, dealers fill orders from their own inventory or by matching them with other orders. A quote driven market is the opposite of an order driven market, which displays individual investors' bid and ask prices and the number of shares they want to trade. Order execution is not guaranteed in an order driven market, but it is guaranteed in a quote driven market because market makers are required to meet the bid and ask prices they quote. A quote driven market is more liquid but lacks transparency. A hybrid market combines the features of both quote driven and order driven markets. The NYSE and Nasdaq are both considered hybrid markets. source Click hereOrder Driven Market: A financial market where all buyers and sellers display the prices at which they wish to buy or sell a particular security, as well as the amounts of thesecurity desired to be bought or sold. This is the opposite of a quote driven market, which is one that only displays bids and asks of designated market makers and specialists for a specific security. he biggest advantage of an order driven market is transparency, since the entire order book is displayed for investors who wish to access this information. Most exchanges charge fees for such information. On the other hand, an order driven market may not have the same degree of liquidity as a quote driven market, since the specialists and market makers in the latter have to transact business at their posted bid and ask prices. source Settlement price: In derivatives markets, the price used for determining profit or loss for the day, as well as margin requirements. The settlement price is the average price at which a contract trades, calculated at both the open and close of each trading day. Additionally, it is important because it determines whether a trader may be required to post additional margins. It is generally set by defined procedures that differ slightly among each exchange and the instrument traded. Typically, the settlement price is set by determining the weighted average price over a certain period of trading, typically shortly before the close of the market. For example, on the Chicago Mercantile Exchange, the settlement prices of certain equity futures are determined by a volume weighted average of pit trading activity. source Expiration time: A specified time, after which the options contract is no longer valid. The expiration time gives a more specific deadline to an options contract on top of the expiration date by giving a time of day. The expiration time will not be the same as the last time to trade the option. Since many public holders of options deal through brokers, they face different expiration times. The last day to trade an option is the third Friday of the expiration month, but the actual expiration time is not until the next day (Saturday). A public holder of an option usually must declare their notice to exercise by 5:00 p.m. on the Friday. This will allow the broker to notify the exchange by the actual expiration time on the expiration date. Furthermore it depends on the exchange, for example the Chicago Board of Trade limits trading on expiring options to 3:00 p.m. Eastern on the last trading day. source Expiration date: The last day that an options or futures contract is valid. When an investor buys an option, the contract gives them the right but not the obligation to buy or sell an asset at a predetermined price, called a strike price, within a given time period, which is on or before the expiration date. If the investor chooses not to exercise that right, the option expires and becomes worthless and the investor loses the money paidClick hereto buy the option. The expiration date for all listed stock options in the United States is normally the third Friday of the contract month, which is the month when the contractexpires. However, when that Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday. Once an options or futures contract passes its expiration date, the contract is invalid.source Ticker symbols: An arrangement of characters (usually letters) representing a particular security listed on an exchange or otherwise traded publicly. When a company issues securities to the public marketplace, it selects an available ticker symbol for its securities which investors use to place trade orders. Every listed security has a unique ticker symbol, facilitating the vast array of trade orders that flow through the financial markets every day. Stock symbols are the most recognized type of ticker symbol. Stocks listed and traded on U.S. exchanges such as the NYSE have symbols with up to three letters. Nasdaq-listed stocks have four-letter symbols.Ticker symbols for options are structured to represent the underlying stock ticker they are based on and also their expiration date and contract type (either a put or a call option). Mutual fund ticker symbols are usually alphanumeric and end with the letter X to differentiate them from stock symbols. source ISIN code: A code that uniquely identifies a specific securities issue. The organization that allocates ISINs in any particular country is the country's respective National Numbering Agency (NNA). All internationally traded securities issuers are urged to use this numbering scheme, which is now the accepted standard by virtually all countries. The United States and Canada primarily use a similar scheme known as a CUSIP number. source SEDOL: A unique identification code, consisting of seven alphanumeric characters, that is assigned to all securities trading on the London Stock Exchange and on other smaller exchanges in the United Kingdom. SEDOL is used for U.K. domestic and foreign stocks, unit trusts, investment trusts and insurance-linked securities. U.K. stocks that do not trade in the United States can be identified by their SEDOL code. SEDOL codes are comparable to CUSIP numbers issued by the Committee on Uniform Securities Identification Procedures for all securities traded in the U.S. A number of circumstances may trigger the issuance of a new SEDOL code, including a change of corporate headquarters to a different country or a corporate merger. Other events only require an issuance of a new code if a new ISIN is issued. These events include a company name change, takeovers and share reclassifications. source Click hereFIX: A financial information exchange (FIX) protocol system used by funds, investment managers and firms. FIX systems are used to transfer accurate and timely financial information regarding securities trades through and across security exchange houses, enabling users to make timely and accurate decisions. FIX has become a standard in equity trades. The FIX protocol is also becoming a standard in options and futures exchanges as well. The language, which has undergone many transformations and updates, was first introduced in 1992 for equity trading between Salomon Brothers and Fidelity Investments. source Algorithm: A formula or set of steps for solving a particular problem. To be an algorithm, a set of rules must be unambiguous and have a clear stopping point. Algorithms can be expressed in any language, from natural languages like English or French to programming languages like FORTRANWe use algorithms every day. For example, a recipe for baking a cake is an algorithm. Most programs, with the exception of some artificial intelligence applications, consist of algorithms. Inventing elegant algorithms -- algorithms that are simple and require the fewest steps possible -- is one of the principal challenges in programming. source 。