46 lines
2.5 KiB
Plaintext
46 lines
2.5 KiB
Plaintext
519
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OPTION TrAdINg STrATegIeS
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Comment. This strategy provides an interesting alternative method of pyramiding—that is, increas-
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ing the size of a winning position. For example, a trader who is already long a futures contract at a
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profit and believes the market is heading higher may wish to increase his position without doubling
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his risk in the event of a price reaction—as would be the case if he bought a second futures contract.
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Such a speculator could choose instead to supplement his long position with the purchase of a call,
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thereby limiting the magnitude of his loss in the event of a price retracement, in exchange for real-
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izing a moderately lower profit if prices continued to rise.
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Figure 35.9 compares the alternative strategies of buying two futures versus buying a futures con-
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tract and a call. (For simplicity of exposition, the diagram assumes that both the futures contract and
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the call are purchased at the same time.) As can be seen, the long two futures position will always do
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moderately better in a rising market (by an amount equal to the premium paid for the call), but will
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lose more in the event of a significant price decline. The difference in losses between the two strate-
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gies will widen as larger price declines are considered.
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Strategy 10: bearish “texas Option hedge” (Short Futures +
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Long put)
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example. Sell August gold futures at $1,200 and simultaneously buy an August $1,200 gold put at a
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premium of $38.70/oz ($3,870). (See Table 35.10 and Figure 35.10.)
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Comment. This strategy is perhaps most useful as an alternative means of increasing a short position.
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As illustrated in Figure 35.10, the combination of a short futures contract and a long put will gain
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moderately less than 2 short futures contracts in a declining market, but will lose a more limited
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amount in a rising market.
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tabLe 35.10 profit/Loss Calculations: bearish “texas Option hedge” (Short Futures + Long put)
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(1) (2) (3) (4) (5) (6)
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Futures price at
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expiration ($/oz)
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premium of august $1200
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put at Initiation ($/oz)
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$ amount of
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premium paid
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profit/Loss on Short
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Futures position
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put Value at
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expiration
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profit/Loss on position
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[(4) + (5) – (3)]
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1,000 38.7 $3,870 $20,000 $20,000 $36,130
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1,050 38.7 $3,870 $15,000 $15,000 $26,130
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1,100 38.7 $3,870 $10,000 $10,000 $16,130
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1,150 38.7 $3,870 $5,000 $5,000 $6,130
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1,200 38.7 $3,870 $0 $0 –$3,870
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1,250 38.7 $3,870 –$5,000 $0 –$8,870
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1,300 38.7 $3,870 –$10,000 $0 –$13,870
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1,350 38.7 $3,870 –$15,000 $0 –$18,870
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1,400 38.7 $3,870 –$20,000 $0 –$23,870 |