EXHIBIT 9.13 Isabel’s long put spread in Johnson & Johnson.
62.50–65 Put Spread
Delta −0.273
Gamma−0.001
Theta +0.005
Vega −0.006
These two spreads were bought for a combined total of 2.50. The
collective position, composed of the four legs of these two spreads, forms a
new strategy altogether.
The two traders together have created a box. This box, which is empty of
both profit and loss, is represented by greeks that almost entirely offset each
other. Sam’s positive delta of 0.29 is mostly offset by Isabel’s −0.273 delta.
Gamma, theta, and vega will mostly offset each other, too.
Chapter 6 described a box as long synthetic stock combined with short
synthetic stock having a different strike price but the same expiration
month. It can also be defined, however, as two vertical spreads: a bull (bear)
call spread plus a bear (bull) put spread with the same strike prices and
expiration month.
The value of a box equals the present value of the distance between the
two strike prices (American-option models will also account for early
exercise potential in the box’s value). This 2.50 box, with 38 days until
expiration at a 1 percent interest rate, has less than a penny of interest
affecting its value. Boxes with more time until expiration will have a higher
interest rate component. If there was one year until expiration, the
combined value of the two verticals would equal 2.475. This is simply the
distance between the strikes minus interest (2.50–[2.50 × 0.01]).
Credit spreads are often made up of OTM options. Traders betting against
a stock rising through a certain price tend to sell OTM call spreads. For a
stock at $50 per share, they might sell the 55 calls and buy the 60 calls. But
because of the synthetic relationship that verticals have with one another,
the traders could buy an ITM put spread for the same exposure, after