33 lines
2.2 KiB
Plaintext
33 lines
2.2 KiB
Plaintext
162 Part II: Call Option Strategies
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Number of
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round lots = Current delta x Number of short calls - Round lots held long
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to buy
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Note: If a negative number results, stock should be sold, not bought.
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These formulae can be verified by using the numbers from the examples above. For
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example, when the delta of the October 50 was .80 with the stock at 57, it was seen
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that buying 100 shares of stock would reestablish a neutral ratio.
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Number of round lots to buy= .80 x 5 3 = 4- 3 = 1
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Also, if the position was to be rolled up to the October 60 (delta = .40), it was seen
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that 7.5 October 60's would theoretically be sold:
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Number of calls to sell = __l_ = 7.5 .40
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There is a more general approach to this problem, one that can be applied to
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any strategy, no matter how complicated. It involves computing whether the position
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is net short or net long. The net position is reduced to an equivalent number of shares
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of common stock and is commonly called the "equivalent stock position" (ESP). Here
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is a simple formula for the equivalent stock position of any option position:
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ESP = Option quantity x Delta x Shares per option
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Example: Suppose that one is long 10 XYZ July 50 calls, which currently have a delta
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of .45. The option is an option on 100 shares of XYZ. Thus, the ESP can be computed:
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ESP = 10 x .45 x 100 = 450 shares
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This is merely saying that owning 10 of these options is equivalent to owning 450
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shares of the underlying common stock, XYZ. The reader should already understand
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this, in that an option with a delta of .45 would appreciate by .45 points if the com
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mon stock moved up 1 dollar. Thus, 10 options would appreciate by 4.5 points, or
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$450. Obviously, 450 shares of common stock would also appreciate by $450 if they
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moved up by one point.
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Note that there are some options - those that result from a stock split- that are
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for more than 100 shares. The inclusion of the term "shares per option" in the for
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mula accounts for the fact that such options are equivalent to a different amount of
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stock than most options.
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The ESP of an entire option and stock position can be computed, even if sev
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eral different options are included in the position. The advantage of this simple cal- |