50 lines
2.4 KiB
Plaintext
50 lines
2.4 KiB
Plaintext
Chapter 40: Advanced Concepts 893
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change in the securities involved in the position. There is one absolute truism and
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that is that the serious strategist should be aware of the risk his position has with
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respect to at least the four basic measures of delta, gamma, theta, and vega. To be
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ignorant of the risk is to be delinquent in the management of the position.
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TRADING GAMMA FROM THE LONG SIDE
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The strategist who is selling overpriced options and hedging that purchase with other
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options or stock will often have a position similar to the one described earlier. Large
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stock movements - at least in one direction will typically be a problem for such
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positions. The opposite of this strategy would be to have a position that is long
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gamma. That is, the position does better if the stock moves quickly in one direction.
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While this seems pleasing to the psyche, these types of positions have their own
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brand of risk.
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The simplest position with long gamma is a long straddle, or a backspread
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(reverse ratio spread). Another way to construct a position with long gamma is to
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invert a calendar spread - to buy the near-term option and to sell a longer-term one.
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Since a near-term option has a higher gamma than a longer-term one with the same
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strike, such a position has long gamma. In fact, traders who expect violent action in
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a stock often construct such a position for the very reason that the public will come
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in behind them, bid up the short-term calls (increasing their implied volatility), and
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make the spread more profitable for the trader.
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Unfortunately, all of these positions often involve being long just about every
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thing else, including theta and vega as well. This means that time is working against
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the position, and that swings in implied volatility can be helpful or harmful as well.
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Can one construct a position that is long gamma, but is not so subject to the other
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variables? Of course he can, but what would it look like? The answer, as one might
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suspect, is not an ironclad one.
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For the following examples, assume these prices exist:
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XYZ: 60
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Option
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March 60 call
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June 60 call
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Price
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3.25
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5.50
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Delta
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0.54
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0.57
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Gamma
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0.0510
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0.0306
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Theta
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0.033
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0.021
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Vega
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0.089
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0.147
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Example: Suppose that a strategist wants to create a position that is gamma long, but
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is neutral with respect to both delta and vega. He thinks the stock will move, but is
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not sure of the price direction, and does not want to have any risk with respect to |