44 lines
2.3 KiB
Plaintext
44 lines
2.3 KiB
Plaintext
493
|
||
OPTION TrAdINg STrATegIeS
|
||
Strategy 3b: Long Call (Out-of-the-Money)
|
||
exAMPle. Buy August $1,300 gold futures call at a premium of $9.10/oz ($910), with August gold
|
||
futures trading at $1,200/oz. (See Table 35.3b and Figure 35.3b.)
|
||
Comment. The buyer of an out-of-the-money call reduces his maximum risk in exchange for accept-
|
||
ing a smaller probability that the trade will realize a profit. By definition, the strike price of an out-of-
|
||
the-money call is above the current level of futures. In order for the out-of-the-money call position
|
||
to realize a profit, the futures price (as of the time of the option expiration) must exceed the strike
|
||
price by an amount greater than the premium ($9.10/oz in this example). Note that in the out-of-
|
||
the-money call position, price increases that leave futures below the option strike price will still result
|
||
in a maximum loss on the option. The long out-of-the-money call might be a particularly appropriate
|
||
position for the trader expecting a large price advance, but also concerned about the possibility of a
|
||
large price decline.
|
||
It should be emphasized that the futures price need not necessarily reach the strike price in order
|
||
for the out-of-the-money call to be profitable. If the market rises quickly, the call will increase in
|
||
value and hence can be resold at a profit. (However, this characteristic will not necessarily hold true
|
||
for slow price advances, since the depressant effect of the passage of time on the option premium
|
||
could more than offset the supportive effect of the increased price level of futures.)
|
||
For small price changes, the out-of-the-money call will change by less than a factor of one-half for
|
||
each dollar change in the futures price. Thus, for small price changes, each long futures position will
|
||
be equivalent to several long out-of-the-money calls in terms of risk.
|
||
tabLe 35.3b profit/Loss Calculations: Long Call (Out-of-the-Money)
|
||
(1) (2) (3) (4) (5)
|
||
Futures price at
|
||
expiration ($/oz)
|
||
premium of august
|
||
$1,300 Call at
|
||
Initiation ($/oz)
|
||
$ amount of
|
||
premium paid
|
||
Call Value at
|
||
expiration
|
||
profit/Loss on
|
||
position [(4) – (3)]
|
||
1,000 9.1 $910 $0 –$910
|
||
1,050 9.1 $910 $0 –$910
|
||
1,100 9.1 $910 $0 –$910
|
||
1,150 9.1 $910 $0 –$910
|
||
1,200 9.1 $910 $0 –$910
|
||
1,250 9.1 $910 $0 –$910
|
||
1,300 9.1 $910 $0 –$910
|
||
1,350 9.1 $910 $5,000 $4,090
|
||
1,400 9.1 $910 $10,000 $9,090 |