38 lines
2.2 KiB
Plaintext
38 lines
2.2 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 825
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Speaking of neutrality, one can also use the deltas of the options in question to
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alter the ratio of puts to calls, making the position initially as neutral as possible. This
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is the suggested approach, since the volatility buyer does not care whether the stock
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goes up or down. He is merely interested in stock movement and/or an increase in
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implied volatility.
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Example: XYZ is again trading at 39.60, and the trader wants a neutral position. He
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should use the deltas of the options to construct a neutral position. Consider the
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October 40 straddle, for example. Assume the volatility used for the probability cal
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culations is 40%. Under those conditions (and the ones assumed in the previous
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example), the October 40 call has a delta of 0.60 and the October 40 put has a delta
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of -0.40. Thus a ratio of buying 2 calls and 3 puts is a neutral ratio. If the call is sell
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ing for 6 and the put is selling for 5, then the break-even points for a 2-by-3 position
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would be 53.5 on the upside and 31 on the downside. This information is summarized
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as follows:
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Delta of October 40 call:
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Delta of October 40 put:
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+0.60
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-0.40
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Delta-neutral ratio: buy 2 calls and 3 puts
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Price of October 40 coll:
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Price of October 40 put:
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Net cost of 2-by-3 position: 27 points
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Break-even points:
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6.00
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5.00
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Upside = 40 + 27 /2 = 53.50
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Downside = 40 - 27 /3 = 31 .00
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So, the probability calculations would endeavor to determine what the chances are of
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the stock ever trading at either 53.50 or 31.00 at any time prior to expiration. In fact,
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since there are straddles available in several expiration months, the strategist would
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want to analyze each of them in a similar fashion. Table 39-1 shows how his choices
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might look. If one were considering buying a strangle, similar calculations could be
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made using the deltas of the put and the call, where the call strike is higher than the
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put strike.
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Another simple strategy that can be used when volatility is low is the calendar
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spread, because it has a positive vega. That is, it can be expected to expand if implied
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volatility increases. For most traders, though, the limited profit nature of the calen- |