23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
underlying declines by just $0.60, the $0.40 that the trader hoped to make
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on rho is wiped out by delta loss. With the share price $0.60 lower, the
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0.760 delta costs the trade about $0.46. Furthermore, the passing of six
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weeks (42 days) will lead to a loss of about $0.55 from time decay because
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of the −0.013 theta. There is also the risk from the fat vegas associated with
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LEAPS. A 1.5 percent drop in implied volatility completely negates any
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hopes of rho profits.
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Aside from the possibility that delta, theta, and vega may get in the way
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of profits, the bid-ask spread with these long-term options tends to be wider
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than with their short-term counterparts. If the bid-ask spread is more than
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$0.40 wide, which is often the case with LEAPS, rho profits are canceled
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out by this cost of doing business. Buying the offer and selling the bid
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negative scalps away potential profits.
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With LEAPS, rho is always a concern. It will contribute to prosperity or
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peril and needs to be part of the trade plan from forecast to implementation.
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Buying or selling a LEAPS call or put, however, is not a practical way to
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speculate on interest rates.
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To take a position on interest rates in the options market, risk needs to be
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distilled down to rho. The other greeks need to be spread off. This is
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accomplished only through the conversions, reversals, and jelly rolls
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described in Chapter 6. However, the bid-ask can still be a hurdle to trading
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these strategies for non–market makers. Generally, rho is a greek that for
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most traders is important to understand but not practical to trade. |