31 lines
1.8 KiB
Plaintext
31 lines
1.8 KiB
Plaintext
EXHIBIT 9.13 Isabel’s long put spread in Johnson & Johnson.
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62.50–65 Put Spread
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Delta −0.273
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Gamma−0.001
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Theta +0.005
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Vega −0.006
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These two spreads were bought for a combined total of 2.50. The
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collective position, composed of the four legs of these two spreads, forms a
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new strategy altogether.
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The two traders together have created a box. This box, which is empty of
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both profit and loss, is represented by greeks that almost entirely offset each
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other. Sam’s positive delta of 0.29 is mostly offset by Isabel’s −0.273 delta.
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Gamma, theta, and vega will mostly offset each other, too.
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Chapter 6 described a box as long synthetic stock combined with short
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synthetic stock having a different strike price but the same expiration
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month. It can also be defined, however, as two vertical spreads: a bull (bear)
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call spread plus a bear (bull) put spread with the same strike prices and
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expiration month.
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The value of a box equals the present value of the distance between the
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two strike prices (American-option models will also account for early
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exercise potential in the box’s value). This 2.50 box, with 38 days until
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expiration at a 1 percent interest rate, has less than a penny of interest
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affecting its value. Boxes with more time until expiration will have a higher
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interest rate component. If there was one year until expiration, the
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combined value of the two verticals would equal 2.475. This is simply the
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distance between the strikes minus interest (2.50–[2.50 × 0.01]).
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Credit spreads are often made up of OTM options. Traders betting against
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a stock rising through a certain price tend to sell OTM call spreads. For a
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stock at $50 per share, they might sell the 55 calls and buy the 60 calls. But
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because of the synthetic relationship that verticals have with one another,
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the traders could buy an ITM put spread for the same exposure, after |