25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
EXHIBIT 11.7 10-lot July–September 165 call calendar.
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But just looking at the net position greeks doesn’t tell the whole story. It
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is important to appreciate the fact that long calendar spreads such as this
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have long vegas. In this case, the vega is +1.522. But what does this number
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really mean? This vega figure means that if IV rises or falls in both the July
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and the September calls by the same amount, the spread makes or loses
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$152 per vol point.
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George’s plan, however, is to see the July’s volatility decline to converge
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with the September’s. He hopes the volatilities of the two months will move
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independently of each other. To better gauge his risk, he needs to look at the
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vega of each option. With the stock at $164.15 the vegas are as follows:
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If George is right and July volatility declines 8 points, from 46 to 38, he
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will make $1,283 ($1.604 × 100 × 8).
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There are a couple of things that can go awry. First, instead of the
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volatilities converging, they can diverge further. Implied volatility is a slave
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to the whims of the market. If the July IV continues to rise while the
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September IV stays the same, George loses $160 per vol point.
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The second thing that can go wrong is the September IV declining along
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with the July IV. This can lead George into trouble, too. It depends the
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extent to which the September volatility declines. In this example, the vega
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of the September leg is about twice that of the July leg. That means that if
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the July volatility loses eight points while the September volatility declines
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four points, profits from the July calls will be negated by losses from the
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September calls. If the September volatility falls even more, the trade is a
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loser. |