26 lines
1.7 KiB
Plaintext
26 lines
1.7 KiB
Plaintext
EXHIBIT 11.10 10-lot Minnesota Mining & Manufacturing Aug–Oct 85–
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90 double call calendar.
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These numbers are a good representation of the position’s risk. Knowing
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that long calendars and long double calendars have maximum losses at the
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expiration of the short-term option equal to the net premiums paid, the max
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loss in this example is 3.20. Break-even prices are not relevant to this
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position because they cannot be determined with any certainty. What is
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important is to get a feel for how much movement can hurt the position.
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To make $19 a day in theta, a −0.468 gamma must be accepted. In the
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long run, $1 of movement is irrelevant. In fact, some movement is favorable
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because the ideal point for MMM to be at, at August expiration is either $85
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or $90. So while small moves are acceptable, big moves are of concern. The
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negative gamma is an illustration of this warning.
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The other risk besides direction is vega. A positive 1.471 vega means the
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calendar makes or loses about $147 with each one-point across-the-board
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change in implied volatility. Implied volatility is a risk in all calendar
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trades. Volatility was one of the criteria studied when considering this trade.
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Recall that the August IV was one point higher than the October and that
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the October IV was in line with the 30-day historical volatility at inception
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of the trade.
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Considering the volatility data is part of the due diligence when
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considering a calendar or a double calendar. First, the (slightly) more
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expensive options (August) are being sold, and the cheaper ones are being
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bought (October). A study of the company reveals no news to lead one to
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believe that Minnesota Mining & Manufacturing should move at a higher
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realized volatility than it currently is in this example. Therefore, the front |