24 lines
1.8 KiB
Plaintext
24 lines
1.8 KiB
Plaintext
Chapter 40: Advanced Concepts 907
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Recall that a computer can perform a large number of Black-Scholes calcula
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tions in a short period of time. Thus, the computer can calculate each option's
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implied volatility and then perform the "percent deviation" calculation even faster.
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The strategist who is interested in establishing this type of neutral spread would only
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have to scan down the list of percent deviations to find candidates for spreading. On
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a given day, the list is usually quite short - perhaps 20 stocks and 10 futures contracts
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will qualify.
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SUMMARY
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In today's highly competitive and volatile option markets, neutral traders must be
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extremely aware of their risks. That risk is not just risk at expiration, but also the cur
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rent risk in the market. Furthermore, they should have an idea of how the risk will
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increase or decrease as the underlying stock or futures contract moves up and down
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in price. Moreover, the passage of time or the volatility that the options are being
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assigned in the marketplace - the implied volatility - are important considerations.
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Even changes in short-term interest rates can be of interest, especially iflonger-term
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options (LEAPS) are involved.
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Once the strategist understands these concepts, he can use them to select new
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positions, to adjust existing ones, and to formulate specific strategies to take advan
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tage of them. He can select a specific criteria that he wants to exploit - selling high
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volatility, for example and use the other measures to construct a position that has
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little risk with respect to any of the other variables. Furthermore, the market-maker
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or specialist, who does not want to acquire any market risk if he can help it, will use
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these techniques to attempt to neutralize all of the current risk, if possible. |