47 lines
2.7 KiB
Plaintext
47 lines
2.7 KiB
Plaintext
499
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OPTION TrAdINg STrATegIeS
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Comment. The short call is a bearish position with a maximum potential gain equal to the premium
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received for selling the call and unlimited risk. However, in return for assuming this unattractive
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maximum reward/maximum risk relationship, the seller of a call enjoys a greater probability of
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realizing a profit than a loss. Note the short at-the-money call position will result in a gain as long as
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the futures price at the time of the option expiration does not exceed the futures price at the time
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of the option initiation by an amount greater than the premium level ($38.80/oz in our example).
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However, the maximum possible profit (i.e., the premium received on the option) will only be real-
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ized if the futures price at the time of the option expiration is below the prevailing market price at the
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time the option was sold (i.e., the strike price). The short call position is appropriate if the trader is
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modestly bearish and views the probability of a large price rise as being very low . If, however, the trader
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anticipated a large price decline, he would probably be better off buying a put or going short futures.
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Strategy 4b: Short Call (Out-of-the-Money)
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example. Sell August $1,300 gold futures call at a premium of $9.10/oz ($910), with August gold
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futures trading at $1,200/oz. (See Table 35.4b and Figure 35.4b.)
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Comment. The seller of an out-of-the-money call is willing to accept a smaller maximum gain (i.e.,
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premium) in exchange for increasing the probability of a gain on the trade. The seller of an out-of-
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the-money call will retain the full premium received as long as the futures price does not rise by an
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amount greater than the difference between the strike price and the futures price at the time of the
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option sale. The trade will be profitable as long as the futures price at the time of the option expiration
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is not above the strike price by more than the option premium ($9.10/oz in this example). The short
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out-of-the-money call represents a less bearish posture than the short at-the-money call position.
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Whereas the short at-the-money call position reflects an expectation that prices will either decline
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or increase only slightly, the short out-of-the-money call merely reflects an expectation that prices
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will not rise sharply.
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tabLe 35.4b profit/Loss Calculations: Short Call (Out-of-the-Money)
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(1) (2) (3) (4) (5)
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Futures price at
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expiration ($/oz)
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premium of august $1,300
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Call at Initiation ($/oz)
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$ amount of
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premium received
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Value of Call
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at expiration
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profit/Loss on
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position [(3) – (4)]
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1,000 9.1 $910 $0 $910
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1,050 9.1 $910 $0 $910
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1,100 9.1 $910 $0 $910
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1,150 9.1 $910 $0 $910
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1,200 9.1 $910 $0 $910
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1,250 9.1 $910 $0 $910
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1,300 9.1 $910 $0 $910
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1,350 9.1 $910 $5,000 –$4,090
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1,400 9.1 $910 $10,000 –$9,090 |