32 lines
1.8 KiB
Plaintext
32 lines
1.8 KiB
Plaintext
Building a Box
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Two traders, Sam and Isabel, share a joint account. They have each been
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studying Johnson & Johnson (JNJ), which is trading at around $63.35 per
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share. Sam and Isabel, however, cannot agree on direction. Sam thinks
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Johnson & Johnson will rise over the next five weeks, and Isabel believes it
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will decline during that period.
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Sam decides to buy the January 62.50 −65 call spread (January has 38
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days until expiration in this example). Sam can buy this spread for 1.28. His
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maximum risk is 1.28. This loss occurs if Johnson & Johnson is below
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$62.50 at expiration, leaving both calls OTM. His maximum gain is 1.22,
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realized if Johnson & Johnson is above $65 (65–62.50–1.28). With Johnson
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& Johnson at $63.35, Sam’s delta is long 0.29 and his other greeks are
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about flat.
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Isabel decides to buy the January 62.50–65 put spread for a debit of 1.22.
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Isabel’s biggest potential loss is 1.22, incurred if Johnson & Johnson is
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above $65 a share at expiration, leaving both puts OTM. Her maximum
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possible profit is 1.28, realized if the stock is below $62.50 at option
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expiration. With Johnson & Johnson at $63.35, Isabel has a delta that is
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short around 0.27 and is nearly flat gamma, theta, and vega.
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Collectively, if both Sam and Isabel hold their trades until expiration, it’s
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a zero-sum game. With Johnson & Johnson below $62.50, Sam loses his
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investment of 1.28, but Isabel profits. She cancels out Sam’s loss by making
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1.28. Above $65, Sam makes 1.22 while Isabel loses the same amount,
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canceling out Sam’s gains. Between the two strikes, Sam has gains on his
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62.50 call and Isabel has gains on her 65 put. The gains on the two options
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will total 2.50, the combined total spent on the spreads—another draw.
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EXHIBIT 9.12 Sam’s long call spread in Johnson & Johnson.
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62.50–65 Call Spread
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Delta +0.290
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Gamma+0.001
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Theta −0.004
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Vega +0.006 |