54 lines
2.7 KiB
Plaintext
54 lines
2.7 KiB
Plaintext
496
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A Complete Guide to the Futures mArket
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Table 35.3d summarizes the profit/loss implications of various long call positions for a range of
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price assumptions. Note that as calls move deeper in-the-money, their profit and loss characteristics
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increasingly resemble a long futures position. The very deep in-the-money $1,050 call provides
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an interesting apparent paradox: The profit/loss characteristics of this option are nearly the same
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as those of a long futures position for all prices above $1,050, but the option has the advantage of
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limited risk for lower prices. How can this be? Why wouldn’t all traders prefer the long $1,050
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call to the long futures position and, therefore, bid up its price so that its premium also reflected
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more time value? (The indicated premium of $15,520 for the $1,050 call consists almost entirely
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of intrinsic value.)
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There are two plausible explanations to this apparent paradox. First, the option price reflects
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the market’s assessment that there is a very low probability of gold prices moving to this deep in-
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the-money strike price, and therefore the market places a low value on the time premium. In other
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words, the market places a low value on the loss protection provided by an option with a strike price
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so far below the market. Second, the $1,050 call represents a fairly illiquid option position, and the
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quoted price does not reflect the bid/ask spread. No doubt, a potential buyer of the call would have
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had to pay a higher price than the quoted premium in order to assure an execution.
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tabLe 35.3d profit/Loss Matrix for Long Calls with Different Strike prices
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Dollar amount of premiums paid
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$1,050 $1,100 $1,150 $1,200 $1,250 $1,300 $1,350
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Call Call a Call Call a Call Call a Call
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$15,520 $11,010 $7,010 $3,880 $1,920 $910 $450
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position profit/Loss at expiration
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Futures price at
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expiration ($/oz)
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Long
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Futures
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at $1,200
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In-the-Money at-the-Money Out-of-the-Money
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$1,050
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Call
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$1,100
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Calla
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$1,150
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Call
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$1,200
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Calla
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$1,250
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Call
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$1,300
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Calla
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$1,350
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Call
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1,000 –$20,000 –$15,520 –$11,010 –$7,010 –$3,880 –$1,920 –$910 –$450
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1,050 –$15,000 –$15,520 –$11,010 –$7,010 –$3,880 –$1,920 –$910 –$450
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1,100 –$10,000 –$10,520 –$11,010 –$7,010 –$3,880 –$1,920 –$910 –$450
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1,150 –$5,000 –$5,520 –$6,010 –$7,010 –$3,880 –$1,920 –$910 –$450
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1,200 $0 –$520 –$1,010 –$2,010 –$3,880 –$1,920 –$910 –$450
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1,250 $5,000 $4,480 $3,990 $2,990 $1,120 –$1,920 –$910 –$450
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1,300 $10,000 $9,480 $8,990 $7,990 $6,120 $3,080 –$910 –$450
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1,350 $15,000 $14,480 $13,990 $12,990 $11,120 $8,080 $4,090 –$450
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1,400 $20,000 $19,480 $18,990 $17,990 $16,120 $13,080 $9,090 $4,550
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aThese calls are compared in Figure 35.3d. |