49 lines
2.4 KiB
Plaintext
49 lines
2.4 KiB
Plaintext
716 Part V: Index Options and Futures
|
||
position has become long by using the delta of the options in the strategy. He can
|
||
then use futures or other options in order to make the position more neutral, if he
|
||
wants to.
|
||
Example: Suppose that both unleaded gasoline and heating oil have rallied some and
|
||
that the futures spread has widened slightly. The following information is known:
|
||
Future or Option
|
||
January heating oil futures:
|
||
January unleaded gasoline futures:
|
||
January heating oil 60 call:
|
||
January unleaded gas 62 put:
|
||
Total profit:
|
||
Price
|
||
.7100
|
||
.6300
|
||
11.05
|
||
1.50
|
||
Net
|
||
Change
|
||
+ .055
|
||
+ .045
|
||
+ 4.65
|
||
- 2.75
|
||
Profit/loss
|
||
+$9,765
|
||
- 5,775
|
||
+$3,990
|
||
The futures spread has widened to 8 cents. If the strategist had established the
|
||
spread with futures, he would now have a one-cent ( $420) profit on five contracts, or
|
||
a $2,100 profit. The profit is larger in the option strategy.
|
||
The futures have rallied as well. Heating oil is up 5½ cents from its initial price,
|
||
while unleaded is up 4½ cents. This rally has been large enough to drive the puts out
|
||
of-the-money. When one has established the intermarket spread with options, and
|
||
the futures rally this much, the profit is usually greater from the option spread. Such
|
||
is the case in this example, as the option spread is ahead by almost $4,000.
|
||
This example shows the most desirable situation for the strategist who has
|
||
implemented the option spread. The futures rally enough to force the puts out-of
|
||
the-money, or alternatively fall far enough to force the calls to be out-of-the-money.
|
||
If this happens in advance of option expiration, one option will generally have almost
|
||
all of its time value premium disappear (the calls in the above example). The other
|
||
option, however, will still have some time value ( the puts in the example).
|
||
This represents an attractive situation. However, there is a potential negative,
|
||
and that is that the position is too long now. It is not really a spread anymore. If
|
||
futures should drop in price, the calls will lose value quickly. The puts will not gain
|
||
much, though, because they are out-of-the-money and will not adequately protect
|
||
the calls. At this juncture, the strategist has the choice of taking his profit - closing
|
||
the position - or making an adjustment to make the spread more neutral once again.
|
||
He could also do nothing, of course, but a strategist would normally want to protect
|
||
a profit to some extent. |