38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Otapter 34: Futures and Futures Options 683
|
||
This profit table shows that selling the August 625 call at 19 and buying the
|
||
August 625 put at 31 is equivalent to - that is, it has the same profit potential as -
|
||
selling the August future at 613. So, if one buys the put and sells the call, he will
|
||
effectively have sold his future at 613 and taken his loss.
|
||
His resultant position after buying the put and selling the call would be a con
|
||
version (long futures, long put, and short call). The margin required for a conversion
|
||
or reversal is zero in the futures market. The margin rules recognize the riskless
|
||
nature of such a strategy. Thus, any excess money that he has after paying for the
|
||
unrealized loss in the futures will be freed up for new trades.
|
||
The futures trader does not have to completely hedge off his position ifhe does
|
||
not want to. He might decide to just buy a put to limit the downside risk.
|
||
Unfortunately, to do so after the futures are already locked limit down may be too lit
|
||
tle, too late. There are many kinds of partial hedges that he could establish - buy
|
||
some puts, sell some calls, utilize different strikes, etc.
|
||
The same or similar strategies could be used by a naked option seller who can
|
||
not hedge his position because it is up the limit. He could also utilize options that are
|
||
still in free trading to create a synthetic futures position.
|
||
Futures options generally have enough out-of-the-money striking prices listed
|
||
that some of them will still be free trading, even if the futures are up or down the
|
||
limit. This fact is a boon to anyone who has a losing position that has moved the daily
|
||
trading limit. Knowing how to use just this one option trading strategy should be a
|
||
worthwhile benefit to many futures traders.
|
||
COMMONPLACE MISPRICING STRATEGIES
|
||
Futures options are sometimes prone to severe mispricing. Of course, any product's
|
||
options may be subject to mispricing from time to time. However, it seems to appear
|
||
in futures options more often than it does in stock options. The following discussion
|
||
of strategies concentrates on a specific pattern of futures options mispricing that
|
||
occurs with relative frequency. It generally m{inifests itself in that out-of-the-money
|
||
puts are too cheap, and out-of-the-money calls are too expensive. The proper term
|
||
for this phenomenon is "volatility skewing" and it is discussed further in Chapter 36
|
||
on advanced concepts. In this chapter, we concentrate on how to spot it and how to
|
||
attempt to profit from it.
|
||
Occasionally, stock options exhibit this trait to a certain extent. Generally, it
|
||
occurs in stocks when speculators have it in their minds that a stock is going to expe
|
||
rience a sudden, substantial rise in price. They then bid up the out-of-the-money
|
||
calls, particularly the near-term ones, as they attempt to capitalize on their bullish
|
||
expectations. When takeover rumors abound, stock options display this mispricing |