37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
Chapter 30: Stock Index Hedging Strategies 537
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Example: Suppose that OEX is trading at 364.50 and a September OEX future - if
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one existed would have a fair value of 367.10. That is, the future would command
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a premium of 2.60. Not only should a future trade with that theoretical premium, but
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so should the "synthetic OEX" composed of puts and calls at the same strike. Hence,
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the synthetic OEX constructed with options should trade at about 367.10 also.
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That is, if the OEX Sep 365 call were selling for 4.60 and the Sep 365 put were
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selling for 2.50, then the synthetic OEX constructed by the use of these two options
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would be priced at 367.10. Recall that one determines the synthetic cost by adding
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the strike, 365, to the call price, 4.60, and then subtracting the put price: 365 + 4.60
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2.50 = 367.0. This synthetic price of 367.10 is literally the same as the theoretical
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futures price of 367.10.
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The same calculations can be applied to any index with listed options trading.
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Let us now return to the broader subject at hand - trading market baskets of stocks
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against futures.
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PROGRAM TRADING
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Two terms that conjure up images of the stock market crash in 1987 and other severe
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price drops are "program trading" and "index arbitrage." Neither one by itself should
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affect the stock market, since they are two-sided strategies - involving buying stocks
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and selling futures. This two-sided aspect should have little effect on the market, the
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oretically. However, in practice, it is often the case that trades are not executed simul
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taneously, and the stock market takes a jump or a dive.
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Program trading is nothing more than trading futures against a general stock
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portfolio. Index arbitrage is trading futures against the exact stocks that comprise an
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index.
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Later discussions will assume that one is trying to create or simulate the index
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itself in order to hedge it with futures. This is the arbitrage approach. However, there
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are many other types of stock positions that may be hedged with the futures. These
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might include a portfolio of one's own construction containing various stocks, or
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might include a group of stocks from which one wants to remove "market risk."
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Normally, one would not own the makeup of any index, but rather would have a
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unique combination of stocks in his portfolio. Such an investor may want to use
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futures to hedge what he does own.
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One reason why an investor who owned stocks would want to sell index prod
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ucts against them might be that he has turned bearish and would prefer to sell futures
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rather than incur the costs involved with selling out his stock portfolio (and repur
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chasing it later). Commission charges are quite small on futures transactions as com- |