41 lines
2.1 KiB
Plaintext
41 lines
2.1 KiB
Plaintext
694 Part V: Index Options and Futures
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Example: The put backspread was established under the following conditions:
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Strike
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550
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600
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Put
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Price
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Theoretical
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Put Price
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5.4
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27.6
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Implied
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Volatility
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13%
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17%
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If January soybean futures should fall to 550, one would expect the implied
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volatility of the January 550 puts that are owned to be about 16% or 17%, since they
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would be at-the-money at that time. This makes the assumption that the at-the
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money puts will have about a 17% implied volatility, which is what they had when the
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position was established.
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Since the strategy involves being long a large quantity of January 550 puts, this
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increase in implied volatility as the futures drop in price will be of benefit to the
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spread.
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Note that the implied volatility of the January 600 puts would increase as well,
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which would be a small negative aspect for the spread. However, since there is only
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one put short and it is quite deeply in the money with the futures at 550, this nega
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tive cannot outweigh the positive effect of the expansion of volatility on the long
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January 550 puts.
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In a similar manner, the call spread would benefit. The implied volatility of the
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written options would actually drop as the futures rallied, since they would be less far
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out-of-the-money than they originally were when the spread was established. While
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the same can be said of the long options in the spread, the fact that there are extra,
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naked, options means the spread will benefit overall.
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In summary, the futures option strategist should be alert to mispricing situations
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like those described above. They occur frequently in a few commodities and occa
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sionally in others. The put backspread strategy has limited risk and might therefore
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be attractive to more individuals; it is best used in downtrending and/or volatile mar
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kets. However, if the futures are in a smooth uptrend, not a volatile one, a ratio call
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spread would be better. In either case, the strategist has established a spread that is
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statistically attractive because he has sold options that are expensive in relation to the
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ones that he has bought. |