26 lines
1.8 KiB
Plaintext
26 lines
1.8 KiB
Plaintext
Exhibit 12.4 shows Susie’s position.
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EXHIBIT 12.4 Delta-neutral short ATM call, long stock position.
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Her delta was just about flat. The delta for the 50 calls was 0.54 per
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contract. Selling a 20-lot creates 10.80 short deltas for her overall position.
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After buying 1,100 shares, she was left long 0.20 deltas, about the
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equivalence of being long 20 shares. Where did her risk lie? Her biggest
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concern was negative gamma. Without even seeing a chart of the stock’s
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price, we can see from the volatility chart that this stock can have big
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moves on earnings. In October, earnings caused a more than 10-point jump
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in realized volatility, to its highest level during the year shown. Whether the
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stock rose or fell is irrelevant. Either event means risk for a premium seller.
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The positive theta looks good on the surface, but in fact, theta provided
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Susie with no significant benefit. Her plan was “in and out and nobody gets
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hurt.” She got into the trade right before the earnings announcement and out
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as soon as implied volatility dropped off. Ideally, she’d like to hold these
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types of trades for less than a day. The true prize is vega.
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Susie was looking for about a 10-point drop in IV, which this option class
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had following the October and January earnings reports. April had a big
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drop in IV, as well, of about eight or nine points. Ultimately, what Susie is
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looking for is reversion to the mean.
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She gauges the normal level of volatility by observing where it is before
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and after the surges caused by earnings. From early November to mid- to
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late- December, the stock’s IV bounced around the 25 percent level. In the
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month of February, the IV was around 25. After the drop-off following
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April earnings and through much of May, the IV was closer to 20 percent.
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In June, IV was just above 25. Susie surmised from this chart that when no |