32 lines
1.5 KiB
Plaintext
32 lines
1.5 KiB
Plaintext
720 Part V: Index Options and Futures
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where vi = volatility
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Pi = price of the underlying
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ui = unit of trading of the option
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Lli = delta of the option
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Example: Suppose that one indeed wants to buy crude oil calls and also buy puts on
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the XOI Index because he thinks that crude oil is cheap with respect to oil stocks.
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The following prices exist:
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July crude futures: 16.35
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Crude July 1550 call: 1.10
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Volatility: 25%
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Call delta: O. 7 4
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$XOI: 256.50
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June 265 put: 14½
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Volatility: 17%
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Put delta: 0. 73
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The unit of trading for XOI options is $100 per point, as it is with nearly all stock and
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index options. The unit of trading for crude oil futures and options is $1,000 per
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point. With all of this information, the ratio can be computed:
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Crude= 1,000 x 0.25 x 16.35 x 0.74
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XOI = 100 x 0.17 x 256.50 x 0.73
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Ratio = Crude/ XOI = 0.91
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Therefore, one would buy 0.91 XOI put for every 1 crude oil call that he bought. For
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small accounts, this is essentially a 1-to-l ratio, but for large accounts, the exact ratio
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could be used (for example, buy 91 XOI puts and 100 crude oil calls). The resultant
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quantities encompass the various differences in these two markets - mainly the price
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and volatility of the underlyings, plus the large differential in their units of trading
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(100 vs. 1,000).
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SUMMARY
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Futures spreading is a very important and potentially profitable endeavor. Utilizing
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options in these spreads can often improve profitability to the point that an originally
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mistaken assumption can be overcome by volatility of price movement. |