35 lines
2.2 KiB
Plaintext
35 lines
2.2 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 829
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TABLE 39-2
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September September September September
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800 call 750 call 730 call 700 call
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September September September September
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Naked sale: 500 put 550 put 570 put 600 put
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Call price 0.20 1.50 3.50 8.80
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Put price 0.40 2.00 3.70 8.50
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Probability of call strike 4% 17% 30% 44%
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Probability of put strike 1% 11% 20% 40%
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vide much of a return even if they expire worthless. Remember that one is
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required to establish the position with margin of at least 10% of the index price
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for naked index options, which would be $6,500 in this case. In fact, it has been
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recommended that one margin the position at the striking price itself (15% of 800,
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or $12,000 in this case). So, taking in only $60, less commissions, for the sale of
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the September 500-800 strangle doesn't seem to provide enough of a reward.
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Thus, the best choice seems to be the September 550-750 strangle. One would be
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making about $320 after commissions if the options expired worthless, and the
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recommended margin would be 15% of 750 (the higher strike), or $11,250 - a
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return of about 2.8% for one month. One cannot annualize these returns, for he
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has no idea if the same option pricing structure will exist in five weeks, when these
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options expire.
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Other probabilities can be calculated as well. For example, suppose one has
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decided to buy a straddle. He might want to know what the odds are not only of
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breaking even, but also of making at least a certain percentage return- say 20%. One
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could also calculate the probability of the stock moving 20% past the break-even
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points. That distance - 20% - is a reasonable figure to use because one would most
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likely be taking some partial profits or adjusting his position if the stock did indeed
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move that far.
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USING STOCK PRICE HISTORY
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All of the work done so far - determining which options are expensive, selecting a
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strategy, and calculating the probabilities of success - has been somewhat theoretical
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in that we haven't done any "back testing" with regard to the volatility of the under
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lying instruments. At this point, one should look at past prices to see if the stock has
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been able to make large moves (whether or not such a move is desired). |