37 lines
2.5 KiB
Plaintext
37 lines
2.5 KiB
Plaintext
718 Part V: Index Options and Futures
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example, the conservative action would be to sell three heating oil futures against the
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heating oil calls.
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The more aggressive course is to hedge the in-the-money option with the future
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underlying the other side of the intermarket spread. In the above example, that
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would entail selling the unleaded gasoline futures against the heating oil calls.
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Suppose that the strategist in the previous example decides to take the conser
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vative action, and he therefore shorts three heating oil futures at .7100, the current
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price. This action preserves large profit potential in either direction. It is better than
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selling out-of-the-money options against his current position.
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He would consider removing the hedge if futures prices dropped, perhaps
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when the puts returned to an in-the-money status with a put delta of at least -0. 75
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or so. At that point, the position would be at its original status, more or less, except
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for the fact that he would have taken a nice profit in the three futures that were sold
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and covered.
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Epilogue. The above examples are taken from actual price movements. In reality,
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the futures fell back, not only to their original price, but far below it. The funda
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mental reason for this reversal was that the weather was warm, hurting demand for
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heating oil, and gasoline supplies were low. By the option expiration in December,
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the following prices existed:
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January heating oil futures: .5200
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January unleaded gas futures: .5200
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Not only had the futures prices virtually crashed, but the intermarket spread
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had been decimated as well. The spread had fallen to zero! It had never reached any
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thing near the 12-cent potential that was envisioned. Any spreader who had estab
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lished this spread with futures would almost certainly have lost money; he probably
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would not have held it until it reached this lowly level, but there was never much
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opportunity to get out at a profit.
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The strategist who established the spread with options, however, most certain
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ly would have made money. One could safely assume that he covered the three
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futures sold in the previous example at a nice profit, possibly 7 points or so. One
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could also assume that as the puts became in-the-money options, he established a
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similar hedge and bought three unleaded gasoline futures when the EFP reached
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-3.00. This probably occurred with unleaded gasoline futures around .5700-5 cents
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in the money.
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Assuming that these were the trades, the following table shows the profits and
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losses. |