EXHIBIT 11.10 10-lot Minnesota Mining & Manufacturing Aug–Oct 85–
90 double call calendar.
These numbers are a good representation of the position’s risk. Knowing
that long calendars and long double calendars have maximum losses at the
expiration of the short-term option equal to the net premiums paid, the max
loss in this example is 3.20. Break-even prices are not relevant to this
position because they cannot be determined with any certainty. What is
important is to get a feel for how much movement can hurt the position.
To make $19 a day in theta, a −0.468 gamma must be accepted. In the
long run, $1 of movement is irrelevant. In fact, some movement is favorable
because the ideal point for MMM to be at, at August expiration is either $85
or $90. So while small moves are acceptable, big moves are of concern. The
negative gamma is an illustration of this warning.
The other risk besides direction is vega. A positive 1.471 vega means the
calendar makes or loses about $147 with each one-point across-the-board
change in implied volatility. Implied volatility is a risk in all calendar
trades. Volatility was one of the criteria studied when considering this trade.
Recall that the August IV was one point higher than the October and that
the October IV was in line with the 30-day historical volatility at inception
of the trade.
Considering the volatility data is part of the due diligence when
considering a calendar or a double calendar. First, the (slightly) more
expensive options (August) are being sold, and the cheaper ones are being
bought (October). A study of the company reveals no news to lead one to
believe that Minnesota Mining & Manufacturing should move at a higher
realized volatility than it currently is in this example. Therefore, the front