39 lines
1.8 KiB
Plaintext
39 lines
1.8 KiB
Plaintext
Cbapter 37: How Volatility Affects Popular Strategies 771
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high implied volatility situations, the bull spread won't expand out to its maximum
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price until expiration draws nigh. That can be frustrating and disappointing.
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Often, the bull spread is established because the option trader feels the options
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are "too expensive" and thus the spread strategy is a way to cut down on the total
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debit invested. However, the ultimate penalty paid is great. Consider the fact that,
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if the stock rose from 100 to 130 in 30 days, any reasonable four-month call pur
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chase (i.e., with a strike initially near the current stock price) would make a nice
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profit, while the bull spread barely ekes out a 5-point gain. To wit, the graph in
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Figure 37-5 compares the purchase of the at-the-money call with a striking price of
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100 and the 90-110 call bull spread, both having implied volatility of 80%. Quite
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clearly, the call purchase dominates to a great extent on an upward move. Of course,
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the call purchase does worse on the downside, but since these are bullish strategies,
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one would have to assume that the trader had a positive outlook for the stock when
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the position was established. Hence, what happens on the downside is not primary
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in his thinking.
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The bull spread and the call purchase have opposite position vegas, too. That is,
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a rise in implied volatility will help the call purchase but will harm the bull spread
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( and vice versa). Thus, the call purchase and the bull spread are not very similar posi
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tions at all.
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If one wants to use the bull spread to effectively reduce the cost of buying an
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expensive at-the-money option, then at least make sure the striking prices are quite
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FIGURE 37-5.
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Call buy versus bull spread in 30 days; IV = 80%.
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Cl)
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~
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2500
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2000
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1500
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1000
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e 500
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Cl.
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-500
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-1000
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Outright Call Buy
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Bull Spread
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---
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140
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Stock |