32 lines
1.7 KiB
Plaintext
32 lines
1.7 KiB
Plaintext
Chapter 40: Advanced Concepts 889
|
||
Continuing to look at the profit picture, the downside is favorable to the spread
|
||
since the short stock in the position would contribute to ever larger profits in the case
|
||
that XYZ tumbles dramatically (see Figure 40-12). The upside is where problems
|
||
could develop. In 7 days, the position breaks even at about 65 on the upside; in 14
|
||
days, it breaks even at about 67.50.
|
||
The reader may be asking, "Why is there such a dramatic risk to the upside? I
|
||
thought the position was delta neutral and gamma neutral." True, the position was
|
||
originally neutral with respect to both those variables. That neutrality explains the
|
||
flatness of the profit curves about the current stock price of 60. However, once the
|
||
stock has moved 1.50 standard deviations to the upside, the neutrality begins to dis
|
||
appear. To see this, let us look at Figures 40-13 and 40-14 that show both the posi
|
||
tion delta and position gamma 7 days and 14 days after the spread was established.
|
||
Again, these are the same numbers listed in the previous tables.
|
||
First, look at the position delta in 7 days (Figure 40-13). Note that the position
|
||
remains relatively delta neutral with XYZ between 57 and 63. This is because the
|
||
gamma was initially neutral. However, the position begins to get quite delta short if
|
||
XYZ rises above 63 or falls below 57 in 7 days. What is happening to gamma while
|
||
this is going on? Since we just observed that the delta eventually changes, that has to
|
||
mean that the position is acquiring some gamma.
|
||
FIGURE 40-12.
|
||
XYZ ratio spread, gamma and delta neutral.
|
||
4300
|
||
3400
|
||
2500
|
||
1600
|
||
~ 700 a..
|
||
0
|
||
-200 53 55 57 59 61 63
|
||
.-1100
|
||
-2000
|
||
Stock Price |