39 lines
2.1 KiB
Plaintext
39 lines
2.1 KiB
Plaintext
544A COMPleTe gUIde TO THe FUTUreS MArKeT
|
||
Choosing an Optimal Strategy
|
||
It the previous sections we examined a wide range of alternative trading strategies. Now what? How
|
||
does a trader decide which of these alternatives provides the best trading opportunity? This ques-
|
||
tion can be answered only if probability is incorporated into the analysis. The selection of an optimal
|
||
option strategy will depend entirely on the trader’s price and volatility expectations. Insofar as these
|
||
expectations will diff er from trader to trader, the optimal option strategy will also vary, and the
|
||
success of the selected option strategy will depend on the accuracy of the trader’s expectations. In
|
||
order to select an optimal option strategy, the trader needs to translate his price expectations into
|
||
probabilities.
|
||
The basic approach requires the trader to assign estimated probability levels for the entire range
|
||
of feasible price intervals. Figure 35.23 illustrates six diff erent types of probability distributions for
|
||
August gold futures. These distributions can be thought of as representing six diff erent hypothetical
|
||
expectations. (The charts in Figure 35.23 implicitly assume that the current price of August gold
|
||
futures is $1,200.) Several important points should be made regarding these probability distributions:
|
||
1. The indicated probability distributions only represent approximations of traders’ price expec-
|
||
tations. In reality, any reasonable probability distribution would be represented by a smooth
|
||
curve. The stair-step charts in Figure 35.23 are only intended as crude models that greatly sim-
|
||
plify calculations. (The use of smooth probability distributions would require integral calculus
|
||
in the evaluation process.)
|
||
Price of August gold futures at option expiration ($/oz)
|
||
Profit/loss at expiration ($)
|
||
1,000
|
||
25,000
|
||
12,500
|
||
−12,500
|
||
−25,000
|
||
0
|
||
1,050 1,100 1,150 1,200 1,250
|
||
Breakeven price on long
|
||
2 calls = $1,238.80
|
||
Long futures
|
||
Long 2 calls
|
||
1,300 1,350 1,400
|
||
37 ,500
|
||
+37 ,500
|
||
Futures price at time
|
||
of position initiation
|
||
FIGURE 35.22 Profi t/loss Profi le: Two long Calls vs. long Futures |