EXHIBIT 12.8 Delta-neutral long call, short stock position.
With the stock at $49.70, the calls had +0.51 delta per contract, or +10.2
for the 20-lot. The short sale of 1,000 shares got Bobby as close to delta-
neutral as possible without trading an odd lot in the stock. The net position
delta was +0.20, or about the equivalent of being long 20 shares of stock.
Bobby’s objective in this case is to profit from an increase in implied
volatility leading up to earnings.
While Susie was looking for reversion to the mean, Bobby hoped for a
further divergence. For Bobby, positive gamma looked like a good thing on
the surface. However, his plan was to close the position just before earnings
were released—before the vol crush and before the potential stock-price
move. With realized volatility already starting to drop off at the time the
trade was put on, gamma offered little promise of gain.
As fate would have it, IV did indeed increase. At the end of the day before
the July earnings report, IV was trading at 35 percent. Bobby closed his
trade by selling his 20-lot of the 50 calls at 2.10 and buying his 1,000 shares
of stock back at $50. Exhibit 12.9 shows the P&(L) for each leg of the
spread.
EXHIBIT 12.9 Profit breakdown.