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Add training workflow, datasets, and runbook

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Rushabh Gosar
2025-12-23 21:17:22 -08:00
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586 Part V: Index Options and Futures
the put and call are based on different underlying indices. This concept is discussed
in more detail in Chapter 35 on futures spreads.
The second way to use options in index spreading is to use options that are less
deeply in-the-money. In such a case, one must use the deltas of the options in order
to accurately compute the proper hedge. He would calculate the number of options
to buy and sell by using the formula given previously for the ratio of the indices,
which incorporates both price and volatility, and then multiplying by a factor to
include delta.
where
vi is the volatility of index i
Pi is the price of index i
ui is the unit of trading
and di is the delta of the selected option on index i
Example: The following data is known:
ZYX: 175.00, volatility= 20%
UVX: 150.00, volatility = 15%
ZYX Dec 175 put: 7, delta= - .45, worth $500/pt.
UVX Dec 150 call: 5, delta= .52, worth $100/pt
Suppose one decides that he wants to set up a position that will profit if the
spread between the two cash indices shrinks. Rather than use the deeply in-the­
money options, he now decides to use the at-the-money options. He would use the
option ratio formula to determine how many puts and calls to buy. (Ignore the put's
negative delta for the purposes of this formula.)
.20 175.00 500 .45 Option Ratio= -x ---x - x - = 6 731 .15 150.00 100 .52 .
He would buy nearly 7 UVX calls for every ZYX put purchased.
In the previous example, using in-the-money options, one had a very small
expense for time value premium and could profit if the indices were volatile, even if
the cash spread did not shrink. This position has a great deal of time value premium
e:x--pense, but could make profits on smaller moves by the indices. Of course, either
one could profit if the cash indices moved favorably.