36 lines
2.2 KiB
Plaintext
36 lines
2.2 KiB
Plaintext
686 Part V: Index Options and Futures
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The two theoretically attractive strategies are:
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1. Buy out-of-the-money puts and sell at-the-money puts; or
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2. Buy at-the-money calls and sell out-of-the-money calls.
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One might just buy one cheap and sell one expensive option - a bear spread
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with the puts, or a bull spread with the calls. However, it is better to implement these
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spreads with a ratio between the number of options bought and the number sold.
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That is, the first strategy involving puts would be a backspread, while the second
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strategy involving calls would be a ratio spread. By doing the ratio, each strategy is a
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more neutral one. Each strategy is examined separately.
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BACKSPREAD/NG THE PUTS
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The backspread strategy works best when one expects a large degree of volatility.
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Implementing the strategy with puts means that a large drop in price by the under
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lying futures would be most profitable, although a limited profit could be made if
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futures rose. Note that a moderate drop in price by expiration would be the worst
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result for this spread.
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Example: Using prices from the above example, suppose that one decides to estab
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lish a backspread in the puts. Assume that a neutral ratio is obtained in the following
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spread:
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Buy 4 January bean 550 puts 31/4
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Sell 1 January bean 600 put at 28
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Net position:
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13 DB
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28 CR
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15 Credit
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The deltas (see Table 34-2) of the options are used to compute this neutral ratio.
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Figure 34-1 shows the profit potential of this spread. It is the typical picture for
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a put backspread - limited upside potential with a great deal of profit potential for
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large downward moves. Note that the spread is initially established for a credit of 15
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cents. If January soybeans have volatile movements in either direction, the position
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should profit. Obviously, the profit potential is larger to the downside, where there
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are extra long puts. However, if beans should rally instead, the spreader could still
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make up to 15 cents ($750), the initial credit of the position.
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Note that one can treat the prices of soybean options in the same manner as he
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would treat the prices of stock options in order to determine such things as break
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even points and maximum profit potential. The fact that soybean options are worth |