38 lines
2.0 KiB
Plaintext
38 lines
2.0 KiB
Plaintext
520A COMPleTe gUIde TO THe FUTUreS MArKeT
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Strategy 11a: Option-protected Long Futures (Long Futures + Long
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at-the-Money put)
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example . Buy August gold futures at $1,200/oz and simultaneously buy an August $1200 gold put at
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a premium of $38.70/oz ($3,870). (See Table 35.11 a and Figure 35.11 a.)
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Comment. A frequently recommended strategy is that the trader implementing (or holding) a long
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futures position can consider buying a put to protect his downside risk. The basic idea is that if the
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market declines, the losses in the long futures position will be off set dollar for dollar by the long put
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position. Although this premise is true, it should be stressed that such a combined position represents
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nothing more than a proxy for a long call. The reader can verify the virtually identical nature of these
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two alternative strategies by comparing Figure 35.11 a to Figure 35.3 a. If prices increase, the long
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futures position will gain, while the option will expire worthless. On the other hand, if prices decline,
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the loss in the combined position will equal the premium paid for the put. In fact, if the call and put
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premiums are equal, a long futures plus long put position will be precisely equivalent to a long call.
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In most cases, the trader who fi nds the profi t/loss profi le of this strategy attractive would be better
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off buying a call, because the transaction costs are likely to be lower. However, if the trader already
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holds a long futures position, buying a put may be a reasonable alternative to liquidating this position
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and buying a call.
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Price of August gold futures at option expiration ($/oz)
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Futures price at
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time of position
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initiation and
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strike price
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Breakeven price = $1,180.65
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Profit/loss at expiration ($)
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1,000
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37,500
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50,000
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25,000
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−25,000
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−37,500
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12,500
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−12,500
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0
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1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400
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Short 2 futures
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Short futures + long put
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FIGURE 35.10 Profi t/loss Profi le: Bearish “T exas Option Hedge” (Short Futures + long Put) |