27 lines
1.8 KiB
Plaintext
27 lines
1.8 KiB
Plaintext
Example 1
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Imagine a trader, Arlo, is studying the following chart of Agilent
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Technologies Inc. (A). See Exhibit 17.1 .
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EXHIBIT 17.1 Agilent Technologies Inc. daily candles.
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Source : Chart courtesy of Livevol® Pro ( www.livevol.com )
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The stock has been in an uptrend for six weeks or so. Close-to-close
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volatility hasn’t increased much. But intraday volatility has increased
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greatly as indicated by the larger candles over the past 10 or so trading
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sessions. Earnings is coming up in a week in this example, however implied
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volatility has not risen much. It is still “cheap” relative to historical
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volatility and past implied volatility. Arlo is bullish. But how does he play
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it? He needs to use what he knows about the greeks to guide his decision.
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Arlo doesn’t want to hold the trade through earnings, so it will be a short-
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term trade. Thus, theta is not much of a concern. The low-priced volatility
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guides his strategy selection in terms of vega. Arlo certainly wouldn’t want
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a short-vega trade. Not with the prospect of implied volatility potential
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rising going into earnings. In fact, he’d actually want a big positive vega
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position. That rules out a naked/cash-secured put, put credit spread and the
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likes.
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He can probably rule out vertical spreads all together. He doesn’t need to
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spread off theta. He doesn’t want to spread off vega. Positive gamma is
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attractive for this sort of trade. He wouldn’t want to spread that off either.
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Plus, the inherent time component of spreads won’t work well here. As
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discussed in Chapter 9, the bulk of vertical spreads profits (or losses) take
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time to come to fruition. The deltas of a call spread are smaller than an
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outright call. Profits would come from both delta and theta, if the stock rises
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to the short strike and positive theta kicks in. |