34 lines
2.5 KiB
Plaintext
34 lines
2.5 KiB
Plaintext
Cl,apter 6: Ratio Call Writing 161
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Example: An investor initially sets up a neutral 5:3 ratio of XYZ October 50 calls to
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XYZ stock, as was determined previously. The stock is at 49 and the delta is .60.
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Furthermore, suppose the stock rises to 57 and the call now has a delta of .80. The
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neutral ratio would currently be 1/.80 ( = 1.20) or 5:4. The ratio writer could thus buy
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another 100 shares of the underlying stock.
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Alternatively, he might buy in one of the short calls. In this particular example,
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buying in one call would produce a 4:3 ratio, which is not absolutely correct. If he
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had had a larger position initially, it would be easier to adjust to fractional ratios.
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When the stock declines, it is necessary to increase the ratio. This can be accom
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plished by either selling more calls or selling out some of the long stock. In theory,
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these adjustments could be made constantly to keep the position neutral. In practice,
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one would allow for a few points of movement by the underlying stock before adjust
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ing. If the underlying stock rises too far, it may be logical for the neutral strategist to
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adjust by rolling up. Similarly, he would roll down if the stock fell to or below the next
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lower strike. The neutral ratio in that case is determined by using the delta of the
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option into which he is rolling.
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Example: With XYZ at 57, an investor is contemplating rolling up to the October 60's
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from his present position of long 300 shares and short 5 XYZ October 50's. If the
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October 60 has a delta of .40, the neutral ratio for the October 60's is 2.5:l (1 + .40).
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Since he is already long 300 shares of stock, he should now be short 7.5 calls (3 x 2.5).
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Obviously, he would sell 7 or 8, probably depending on his short-term outlook for the
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stock.
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If one prefers to adopt an even more sophisticated approach, he can make
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adjustments between striking prices by altering his stock position, and can make
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adjustments by rolling up or down if the stock reaches a new striking price. For those
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who prefer formulae, the following ones summarize this information:
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1. When establishing a new position or when rolling up or down, at the next strike:
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N b f all t 11 Round lots held long um er o c s o se =
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Delta of call to be sold
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Note: When establishing a new position, one must first decide how many shares
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of the underlying stock he can buy before utilizing the formula; 1,000
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shares would be a workable amount.
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2. When adjusting between strikes by buying or selling stock: |