38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
642 Part V: Index Options and Futures
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exercise it; or is there too great a chance that OEX will rally and wipe out his dis
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count?
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If he buys this put when there is very little time left in the trading day, it might
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be enough of a discount. Recall that a one-point move in OEX is roughly equivalent
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to 15 points on the Dow (while a one-point move in SPX is about 7.5 Dow points).
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Thus, this O EX discount of 0.4 7 is about equal to 7 Dow points. Obviously, this is not
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a lot of cushion, because the Dow can easily move that far in a short period of time,
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so it would be sufficient only if there are just a few minutes of trading left and there
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were not previous indications oflarge orders to buy "market on close."
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However, if this situation were presented to the discounter at an earlier time in
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the trading day, he might defer because he would have to hedge his position and that
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might not be worth the trouble. If there were several hours left in the trading day,
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even a discount of a full point would not be enough to allow him to remain unhedged
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(one full OEX point is about 15 Dow points). Rather, he would, for example, buy
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futures, buy OEX calls, or sell puts on another index. At the end of the day, he could
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exercise the puts he bought at a discount and reverse the hedge in the open market.
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CONVERSIONS AND REVERSALS
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Conversions and reversals in cash-based options are really the market basket hedges
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(index arbitrage) described in Chapter 30. That is, the underlying security is actually
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all the stocks in the index. However, the more standard conversions and reversals can
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be executed with futures and futures options.
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Since there is no credit to one's account for selling a future and no debit for buy
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ing one, most futures conversions and reversals trade very nearly at a net price equal
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to the strike. That is, the value of the out-of-the-money futures option is equal to the
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time premium of the in-the-money option that is its counterpart in the conversion or
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reversal.
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Example: An index future is trading at 179.00. If the December 180 call is trading
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for 5.00, then the December 180 put should be priced near 6.00. The time value pre
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mium of the in-the-money put is 5.00 (6.00 + 179.00 - 180.00), which is equal to the
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price of the out-of-the-money call at the same strike.
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If one were to attempt to do a conversion or reversal with these options, he
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would have a position with no risk of loss but no possibility of gain: A reversal would
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be established, for example, at a "net price" of 180. Sell the future at 179, add the
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premium of the put, 6.00, and subtract the cost of the call, 5.00: 179 + 6.00 - 5.00 =
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180.00. As we know from Chapter 27 on arbitrage, one unwinds a conversion or
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reversal for a "net price" equal to the strike. Hence, there would be no gain or loss
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from this futures reversal. |