39 lines
2.9 KiB
Plaintext
39 lines
2.9 KiB
Plaintext
Chapter 40: Advanced Concepts 895
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well as look at how the risk measures behave as time passes and the stock price
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changes.
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Figure 40-15 (see Tables 40-10, 40-11, and 40-12) shows the profit potential in
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7 days, in 14 days, and at March expiration. Figure 40-16 shows the position vega at
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the 7- and 14-day time intervals. Before discussing these items, the data will be pre
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sented in tabular form at three different times: in 7 days, in 14 days, and at March
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expiration.
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The data in Table 40-10 depict the position in 7 days.
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Table 40-11 represents the results in 14 days.
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Finally, the position as it looks at March expiration should be known as well (see
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Table 40-12).
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In each case, note that the stock prices are calculated in accordance with the
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statistical formula shown in the last section. The more time that passes, the further it
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is possible for the stock to roam from the current price.
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The profit picture (Figure 40-15) shows that this position looks much like a long
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straddle would: It makes large, symmetric profits if the stock goes either way up or
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way down. Moreover, the losses if the stock remains relatively unchanged can be
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large. These losses tend to mount right away, becoming significant even in 14 days.
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Hence, if one enters this type of position, he had better get the desired stock move
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ment quickly, or be prepared to cut his losses and exit the position.
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The most startling thing to note about the entire position is the devastating effect
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of time on the position. The profit picture shows that large losses will result if the stock
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movement that is expected does not materialize. These losses are completely due to
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time decay. Theta is negative in the initial position ($625 of losses per day), and
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remains negative and surprisingly constant - until March expiration ( when the long
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calls expire). Time also affects vega. Notice how the vega begins to get negative right
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away and keeps getting much more negative as time passes. Simply, it can be seen that
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as time passes, the position becomes vulnerable to increases in implied volatility.
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This relationship between time and volatility might not be readily apparent to
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the strategist unless he takes the time to calculate these sorts of tables or figures. In
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fact, one may be somewhat confounded by this observation. What is happening is
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that as time passes, the options that are owned are less explosive if volatility increas
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es, but the options that were sold have a lot of time remaining, and are therefore apt
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to increase violently if volatility spurts upward.
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Figures 40-17 and 40-18 provide less enlightening information about delta and
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gamma. Since gamma was positive to start with, the delta increases dramatically as
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the stock rises, and decreases just as fast if the stock falls (Figure 40-18). This is stan
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dard behavior for positions with long gamma; a long straddle would look very similar. |