35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
Chapter 26: Buying Options and Treasury Bills 417
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the 30-day period. However, for purposes of computing annualized risk easily, the
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assumption that will be made is that the risk during any holding period is 100%,
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regardless of the length of time remaining in the life of the option. Thus, a 30-day
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option purchase represents an annualized risk of 1,200% (100% risk every 30 days
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times twelve 30-day periods in one year). Ninety-day purchases have 400% annual
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ized risk, and 180-day purchases have 200% annualized risk. There is a multitude
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of ways to combine purchases in these three holding periods so that the overall risk
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is 10% annualized.
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Example: An investor could put 2½% of his total money into 90-day purchases four
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times a year. That is, 2½% of his total assets are being subjected to a 400% annual
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ized risk; 400% times 2½% equals 10% annualized risk on the total assets. Of course,
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the remainder of the assets would be placed in risk-free, income-bearing securities.
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Another of the many combinations might be to place 1 % of the total assets in 90-day
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purchases and also place 3% of the total assets in 180-day purchases. Thus, 1 % of
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one's total money would be subjected to a 400% annual risk and 3% would be sub
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jected to a 200% annual risk (.01 times 400 plus .03 times 200 equals 10% annualized
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risk on the entire assets). If one prefers a formula, annualized risk can be computed
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as:
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A al. d • k • r 1. Percent of total 360 nnu 1ze ns on entire portro 10 = d x assets investe Holding period
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If one is able to diversify into several holding periods, the annualized risk is merely
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the sum of the risks for each holding period.
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With this information in mind, the strategist can utilize option purchases of 1
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month, 3 months, and 6 months, preferably each generated by a separate computer
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analysis similar to the one described earlier. He will know how much of his total
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assets he can place into purchases of each holding period, because he will know his
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annualized risk.
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Example: Suppose that a very large investor, or pool of investors, has $1 million com
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mitted to this T-bill/option strategy. Further, suppose ½ of 1 % of the money is to be
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committed to 30-day option purchases with the idea of reinvesting every 30 days.
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Similarly, ½ of 1 % is to be placed in 90-day purchases and 1 % in 180-day purchases.
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The annualized risk is 10%:
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Total annualized risk = ½% x 360 + ½% x 360 + 1 % x 360
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30 90 180
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= .06 + .02 + .02 = 10% |