18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
The options in this spread all share the same strike price, but they involve
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two different months—April and May. In this example, the trader is long
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synthetic stock in April and short synthetic stock in May. Like the
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conversion, reversal, and box, this is a mostly flat position. Delta, gamma,
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theta, vega, and even rho have only small effects on a jelly roll, but like the
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others, this spread serves a purpose.
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A trader with a conversion or reversal can roll the option legs of the
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position into a month with a later expiration. For example, a trader with an
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April 50 conversion in his inventory (short the 50 call, long the 50 put, long
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stock) can avoid pin risk as April expiration approaches by trading the roll
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from the above example. The long April 50 call and short April 50 put
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cancel out the current option portion of the conversion leaving only the
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stock. Selling the May 50 calls and buying the May 50 puts reestablishes
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the conversion a month farther out.
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Another reason for trading a roll has to do with interest. The roll in this
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example has positive exposure to rho in April and negative exposure to rho
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in May. Based on a trader’s expectations of future changes in interest rates,
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a position can be constructed to exploit opportunities in interest. |