27 lines
1.8 KiB
Plaintext
27 lines
1.8 KiB
Plaintext
Two Courses of Action
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Although there may be many motivations for trading a double calendar,
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there are only two courses of action: buy it or sell it. While, for example,
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the trader’s goal may be to capture theta, buying a double calendar comes
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with the baggage of the other greeks. Fully understanding the
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interrelationship of the greeks is essential to success. Option traders must
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take a holistic view of their positions.
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Let’s look at an example of buying a double calendar. In this example,
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Minnesota Mining & Manufacturing (MMM) has been trading in a range
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between about $85 and $97 per share. The current price of Minnesota
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Mining & Manufacturing is $87.90. Economic data indicate no specific
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reasons to anticipate that Minnesota Mining & Manufacturing will deviate
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from its recent range over the next month—that is, there is nothing in the
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news, no earnings anticipated, and the overall market is stable. August IV is
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higher than October IV by one volatility point, and October implied
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volatility is in line with 30-day historical volatility. There are 38 days until
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August expiration, and 101 days until October expiration.
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The Aug–Oct 85–90 double calendar can be traded at the following
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prices:
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Much like a traditional calendar spread, the price points cannot be
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definitively plotted on a P&(L) diagram. What is known for certain is that at
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August expiration, the maximum loss is $3,200. While it’s comforting to
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know that there is limited loss, losing the entire premium that was paid for
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the spread is an outcome most traders would like to avoid. We also know
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the maximum gains occur at the strike prices; but not exactly what the
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maximum profit can be. Exhibit 11.10 provides an alternative picture of the
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position that is useful in managing the trade on a day-to-day basis. |