Use PowerPacks to trade sector moves

• October 27, 2005
• Eddie Kwong

For years, active options and
futures investors have looked for volatility in markets as a source of
increasing returns, generating alpha, or to hedge exposure and readily protect
positions without creating sizable tax events.

The energy industry currently
provides a great example of a sector that has been marked by turbulent pricing
pressures from supply chain interruptions. Energy price volatility impacts all
sectors of capital investment, from Wall Street to Main Street.

If you wish to trade
options on a particular industry group such as energy, you can do this using a
group of products recently developed by the CBOE called

PowerPacks^SM
Sector Indexes. These sector products provide active
options and futures investors with a way to deploy options strategies on
individual sector indices that are exhibiting strong moves.

There are 12 cash settled index
PowerPacks futures and options available. Each is comprised of a basket of 25
securities that are among the largest and most actively traded companies in
their respective industry groups.

Looking for exposure in the
energy arena? You could consider enhancing your position with

CBOE PowerPacks Oil Services Index (options symbol PVO/futures symbol PV) or
the

CBOE PowerPacks Oil Index (options symbol POY/futures symbol PO). The CBOE
PowerPacks Oil Services Index is up over 30% YTD and is comprised of such
notable companies as Halliburton
(
HAL |
Quote |
Chart |
News |
PowerRating) and Schlumberger
(
SLB |
Quote |
Chart |
News |
PowerRating). The CBOE PowerPacks Oil
Index is up 21.9% YTD and includes BP PLC and ExxonMobil
(
XOM |
Quote |
Chart |
News |
PowerRating).

Now, let’s look at a specific
example (commissions and other transaction costs are not included in the
following example). Oil prices rose steadily all summer, and the impact of the
recent hurricanes have made you wary of prices coming down before the New Year.
You’re bullish on oil company stocks, but not certain which companies,
specifically, will be most affected. You could then consider the

CBOE PowerPacks Oil Index (POY). POY is a narrow-based, modified
capitalization-weighted index composed of twenty-five of the highest
capitalization international and domestic companies within the oil sector
involved in exploration and production of petroleum products that are actively
traded in the U.S.

Suppose POY is at a
level of 85. Since you’re bullish until December, you decide to employ a Bull
Call spread; buying 10 POY December 80 calls at $3 and selling 10 POY December
87.5 calls at $1.25, for a net debit of $1.75. Figure 1 is an illustration of
what could happen to your position at the time of December expiration:

Figure 1

*All values shown are at the time of expiration.

At expiration
(12/17/05)

* Max Gain: $5,750.00 if POY > or = 87.50 (+ 2.94%)

** Break-even: POY at 81.75
(-3.82%)

*** Unchanged: POY at 85
(+/-0.00%)

**** Max Loss: $1,750.00 if POY
< or = 80 (-5.88%)

In summary, if your outlook is
correct and POY increases to 87.50 before expiration, your maximum gain is
$5,750.00. Your maximum loss (risk) is equal to your initial investment of
$1,750.00 (not including commissions and other transaction costs). A partial
loss is incurred if POY is between 81.75 and 80 by expiration.

For more information on the
CBOE PowerPacks family of futures and options, please click

here.

Options involve risk and are
not suitable for all investors. Prior to buying or selling an option, a person
must receive a copy of Characteristics and Risks of Standardized Options (ODD).
Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or
from The Options Clearing Corporation, One North Wacker Drive, Suite 500,
Chicago, Illinois 60606. The information in this article is provided solely for
general education and information purposes. No statement within this article
should be construed as a recommendation to buy or sell a security or to provide
investment advice. CBOE is a registered trademark and PowerPacks is a
servicemark of Chicago Board Options Exchange, Incorporated. Copyright ©
2005. Chicago Board Options Exchange, Incorporated. All rights
reserved.