38 lines
2.4 KiB
Plaintext
38 lines
2.4 KiB
Plaintext
489
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OPTION TrAdINg STrATegIeS
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is that the profit/loss profile for strategies that include a net long options position will shift
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upward as the time reference point is further removed from the expiration date. The reason is
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that at expiration, options have only intrinsic value; at points prior to expiration, options also
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have time value. Thus, prior to expiration, the holder of an option could liquidate his position at
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a price above its intrinsic value—the liquidation value assumed in the profit/loss profile. Simi-
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larly, the profit/loss profile would be shifted downward for the option writer (seller) at points
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in time prior to expiration. This is true since at such earlier junctures, the option writer would
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have to pay not only the intrinsic value but also the time value if he wanted to cover his position.
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4. It is important to keep in mind that a single option is equivalent to a smaller position size than a
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single futures contract (see section entitled “
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delta—the Neutral Hedge ratio” in the previous
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chapter). Similarly, an out-of-the-money option is equivalent to a smaller position size than an
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in-the-money option. Thus, the trader should also consider the profit/loss profiles consisting
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of various multiples of each strategy. In any case, the preference of one strategy over another
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should be based entirely on the relationship between reward and risk rather than on the absolute
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profit (loss) levels. In other words, strategy preferences should be totally independent of posi-
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tion size.
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5. Trading strategies are evaluated strictly from the perspective of the speculator. Hedging applica-
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tions of option trading are discussed separately at the end of this chapter.
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■ Profit/Loss Profiles for Key Trading Strategies
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Strategy 1: Long Futures
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exAMPle. Buy August gold futures at $1,200. (See Table 35.1 and Figure 35.1.)
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Comment. The simple long position in futures does not require much explanation and is included
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primarily for purposes of comparison to other less familiar trading strategies. As every trader knows,
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the long futures position is appropriate when one expects a significant price advance. However, as will
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tabLe 35.1 profit/Loss Calculations: Long Futures
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Futures price at expiration ($/oz) Futures price Change ($/oz) profit/Loss on position
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1,000 –200 –$20,000
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1,050 –150 –$15,000
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1,100 –100 –$10,000
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1,150 –50 –$5,000
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1,200 0 $0
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1,250 50 $5,000
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1,300 100 $10,000
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1,350 150 $15,000
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1,400 200 $20,000 |