48 lines
2.2 KiB
Plaintext
48 lines
2.2 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads
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Future or Option
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January heating oil futures:
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January unleaded gasoline futures:
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January heating oil 60 call:
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January unleaded gas 62 put:
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Price
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.6550
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.5850
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6.40
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4.25
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715
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Time Value
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Premium
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0.90
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0.75
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The differential in futures prices is .07, or 7 cents per gallon. He thinks it could
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grow to 12 cents or so by early winter. However, he also thinks that oil and oil prod
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ucts have the potential to be very volatile, so he considers using the options. One cent
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is worth $420 for each of these items.
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The time value premium of the options is 1.65 for the put and call combined. If
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he pays this amount ($693) per combination, he can still make money if the futures
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widen by 5.00 points, as he expects. Moreover, the option spread gives him the
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potential for profits if oil products are volatile, even if he is wrong about the futures
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relationship.
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Therefore, he decides to buy five combinations:
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Position
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Buy 5 January heating oil 60 calls @ 6.40
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Buy 5 January unleaded 62 puts @ 4.25
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Total cost:
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Cost
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$13,440
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8,925
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$22,365
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This initial cost is substantially larger than the initial margin requirement for
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five futures spreads, which would be about $7,000. Moreover, the option cost must
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be paid for in cash, while the futures requirement could be taken care of with
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Treasury bills, which continue to earn money for the spreader. Still, the strategist
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believes that the option position has more potential, so he establishes it.
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Notice that in this analysis, the strategist compared his time value premium cost
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to the profit potential he expected from the futures spread itself This is often a good
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way to evaluate whether or not to use options or futures. In this example, he thought
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that, even if futures prices remained relatively unchanged, thereby wasting away his
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time premium, he could still make money - as long as he was correct about heating
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oil outperforming unleaded gasoline.
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Some follow-up actions will now be examined. If the futures rally, the position
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becomes long. Some profit might have accrued, but the whole position is subject to
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losses if the futures fall in price. The strategist can calculate the extent to which his |