38 lines
2.3 KiB
Plaintext
38 lines
2.3 KiB
Plaintext
688 Part V: Index Options and Futures
|
||
Later, one can use the dollars per point to obtain actual dollar cost. Dollars per point
|
||
would be $50 for soybeans options, $100 for stock or index options, $400 for live cat
|
||
tle options, $375 for coffee options, $1,120 for sugar options, etc. In this way, one
|
||
does not have to get hung up in the nomenclature of the futures contract; he can
|
||
approach everything in the same fashion for purposes of analyzing the position. He
|
||
will, of course, have to use proper nomenclature to enter the order, but that comes
|
||
after the analysis is done.
|
||
RATIO SPREADING THE CALLS
|
||
Returning to the subject at hand - spreads that capture this particular mispricing
|
||
phenomenon of futures options - recall that the other strategy that is attractive in
|
||
such situations is the ratio call spread. It is established with the maximum profit
|
||
potential being somewhat above the current futures price, since the calls that are
|
||
being sold are out-of-the-money.
|
||
Example: Again using the January soybean options of the previous few examples,
|
||
suppose that one establishes the following ratio call spread. Using the calls' deltas
|
||
(see Table 34-2), the following ratio is approximately neutral to begin with:
|
||
Buy 2 January bean 600 calls at 11
|
||
Sell 5 January bean 650 calls at 31/2
|
||
Net position:
|
||
22 DB
|
||
171/2 CR
|
||
41/2 Debit
|
||
Figure 34-2 shows the profit potential of the ratio call spread. It looks fairly typ
|
||
ical for a ratio spread: limited downside exposure, maximum profit potential at the
|
||
strike of the written calls, and unlimited upside exposure.
|
||
Since this spread is established with both options out-of-the-money, one needs
|
||
some upward movement by January soybean futures in order to be profitable.
|
||
However, too much movement would not be welcomed (although follow-up strate
|
||
gies could be used to deal with that). Consequently, this is a moderately bullish strat
|
||
egy; one should feel that the underlying futures have a chance to move somewhat
|
||
higher before expiration.
|
||
Again, the analyst should treat this position in terms of points, not dollars or
|
||
cents of soybean movement, in order to calculate the significant profit and loss
|
||
points. Refer to Chapter 11 on ratio call spreads for the original explanation of these
|
||
formulae for ratio call spreads:
|
||
Maximum downside loss = Initial debit or credit
|
||
= -4½ (it is a debit) |