34 lines
1.9 KiB
Plaintext
34 lines
1.9 KiB
Plaintext
491
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OPTION TrAdINg STrATegIeS
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Comment. Once again, this strategy requires little explanation and is included primarily for com-
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parison to other strategies. As any trader knows, the short futures position is appropriate when one
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is expecting a signifi cant price decline. However, as will be seen later in this chapter, for any given
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expected price scenario, some option-based strategy will often off er a more attractive trading oppor-
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tunity in terms of reward/risk characteristics.
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Strategy 3a: Long Call (at-the-Money)
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exAMPle . Buy August $1,200 gold futures call at a premium of $38.80/oz ($3,880), with August gold
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futures trading at $1,200/oz. (See Table 35.3 a and Figure 35.3 a.)
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Comment. The long call is a bullish strategy in which maximum risk is limited to the premium paid
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for the option, while maximum gain is theoretically unlimited. However, the probability of a loss is
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greater than the probability of a gain, since the futures price must rise by an amount exceeding the
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option premium (as of the option expiration) in order for the call buyer to realize a profi t. Two spe-
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cifi c characteristics of the at-the-money option are the following:
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1. The maximum loss will only be realized if futures are trading at or below their current level at
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the time of the option expiration.
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2. For small price changes, each $1 change in the futures price will result in approximately a $0.50
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change in the option price. (At-the-money options near expiration, which will change by a
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greater amount, are an exception.) Thus, for small price changes, a net long futures position is
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equivalent to approximately two call options in terms of risk.
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FIGURE 35.2 Profi t/loss Profi le: Short Futures
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Price of August gold futures at option expiration ($/oz)
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1,000 1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400
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Profit/loss at expiration ($)
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20,000
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15,000
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10,000
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5,000
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−5,000
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−10,000
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−15,000
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−20,000
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0 |