34 lines
2.2 KiB
Plaintext
34 lines
2.2 KiB
Plaintext
710 Part V: Index Options and Futures
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Let's spend a short time discussing these two points. First, he does not want to
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increase his risk. In general, selling options instead of utilizing futures increases one's
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risk. If he sells calls instead of selling futures, and sells puts instead of buying futures,
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he could be increasing his risk tremendously if the futures prices moved a lot. If the
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futures rose tremendously, the short calls would lose money, but the short puts would
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cease to make money once the futures rose through the striking price of the puts.
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Therefore, it is not a recommended strategy to sell options in place of the futures in
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an intramarket or intennarket spread. The next example will show why not.
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Example: A spreader wants to trade an intramarket spread in live cattle. The con
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tract is for 40,000 pounds, so a one-cent move is worth $400. He is going to sell April
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and buy June futures, hoping for the spread to narrow between the two contracts.
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The following prices exist for live cattle futures and options:
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April future: 78.00
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June future: 74.00
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April 78 call: 1.25
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June 74 put: 2.00
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He decides to use the options instead of futures to implement this spread. He
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sells the April 78 call as an alternative to selling the April future; he also sells the June
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74 put as an alternative to buying the June future.
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Sometime later, the following prices exist:
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April future: 68.00
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June future: 66.00
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April 78 call: 0.00
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June 74 put: 8.05
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The futures spread has indeed narrowed as expected - from 4.00 points to 2.00.
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However, this spreader has no profit to show for it; in fact he has a loss. The call that
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he sold is now virtually worthless and has therefore earned a profit of 1.25 points;
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however, the put that was sold for 2.00 is now worth 8.05 - a loss of 6.05 points.
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Overall, the spreader has a net loss of 4.80 points since he used short options, instead
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of the 2.00-point gain he could have had if he had used futures instead.
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The second thing that the futures spreader wants to ensure is that he does not
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pay for a lot of time value premium that is wasted, costing him his potential profits.
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If he buys at- or out-of-the-money calls instead of buying futures, and if he buys at- |