36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
706 Part V: Index Options and Futures
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futures are approximately unchanged at expiration of the March options, he should
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profit handsomely, because the March calls are slightly overpriced at the current
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time, plus they will decay at a faster rate than the May calls over the next two months.
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Suppose that he is correct and March futures are unchanged at expiration of the
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March options. This is still no guarantee of profit, because one must also determine
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where May futures are trading. If the spread between May and March futures
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behaves poorly (May declines with respect to March), then he might still lose money.
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Look at the following table to see how the futures spread between March and May
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futures affects the profitability of the calendar spread. The calendar spread cost 7
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debit when the futures spread was +4 initially.
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Futures Calendar
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Futures Prices Spread May 600 Call Spread
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March/May Price Price Profit/Loss
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594/570 -24 4 -3 cents
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594/580 -14 61/2 _1/2
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594/590 -4 10 +3
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594/600 +6 141/2 +71/2
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Thus, the calendar spread could lose money even with March futures
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unchanged, as in the top two lines of the table. It also could do better than expected
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if the futures spread widens, as in the bottom line of the table.
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The profitability of the calendar spread is heavily linked to the futures spread
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price. In the above example, it was possible to lose money even though the March
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futures contract was unchanged in price from the time the calendar spread was
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initially established. This would never happen with stock options. If one placed a
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calendar spread on IBM and the stock were unchanged at the expiration of the near
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term option, the spread would make money virtually all of the time ( unless implied
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volatility had shrunk dramatically).
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The futures option calendar spreader is therefore trading two spreads at once.
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The first one has to do with the relative pricing differentials (implied volatilities, for
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example) of the two options in question, as well as the passage of time. The second
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one is the relationship between the two underlying futures contracts. As a result, it is
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difficult to draw the ordinary profit picture. Rather, one must approach the problem
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in this manner:
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1. Use the horizontal axis to represent the futures spread price at the expiration of
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the near-term option. |