56 lines
2.3 KiB
Plaintext
56 lines
2.3 KiB
Plaintext
220 Part II: Call Option Strategies
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Example: Early in this chapter, when selection criteria were described, a neutral
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ratio was determined to be 16:10, with XYZ at 44. Suppose, after establishing the
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spread, that the common rallied to 4 7. One could use the current deltas to adjust.
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This information is summarized in Table 11-4. The current neutral ratio is approxi
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mately 14:10. Thus, two of the short April 45's could be bought closing. In practice,
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one usually decreases his ratio by adding to the long side. Consequently, one would
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buy two April 40's, decreasing his overall ratio to 16:12, which is 1.33 and is close to
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the actual neutral ratio of 1.38. The position would therefore be delta-neutral once
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more.
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An alternative way of looking at this is to use the equivalent stock position
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(ESP), which, for any option, is the multiple of the quantity times the delta times the
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shares per option. The last three lines of Table 11-4 show the ESP for each call and
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for the position as a whole. Initially, the position has an ESP of 0, indicating that it is
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perfectly delta-neutral. In the current situation, however, the position is delta short
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140 shares. Thus, one could adjust the position to be delta-neutral by buying 140
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shares of XYZ. If he wanted to use the options rather than the stock, he could buy
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two April 45's, which would add a delta long of 130 ESP (2 x .65 x 100), leaving the
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position delta short 10 shares, which is very near neutral. As pointed out in the above
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paragraph, the spreader probably should buy the call with the most intrinsic value -
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the April 40. Each one of these has an ESP of 90 (1 x .9 x 100). Thus, if one were
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bought, the position would be delta short 50 shares; if two were bought, the total
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position would be delta long 40 shares. It would be a matter of individual preference
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whether the spreader wanted to be long or short the "odd lot" of 40 or 50 shares,
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respectively.
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TABLE 11-4.
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Original and current prices and deltas.
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XYZ common
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April 40 call
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April 45 call
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April 40 delta
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April 45 delta
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Neutral ratio
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April 40 ESP
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April 45 ESP
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Total ESP
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Original Situation
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44
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5
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3
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.80
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.50
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16:10 (.80/.50)
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800 long (l Ox .8 x 100)
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800 shrt ( 16 x .5 x l 00)
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0 (neutral)
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Current Situation
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47
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8
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5
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.90
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.65
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14:10 (.90/.65 = 1.38)
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900 long (10 x .9 x 100)
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l ,040 shrt ( 16 x .65 x l 00)
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140 shrt |