31 lines
1.8 KiB
Plaintext
31 lines
1.8 KiB
Plaintext
586 Part V: Index Options and Futures
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the put and call are based on different underlying indices. This concept is discussed
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in more detail in Chapter 35 on futures spreads.
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The second way to use options in index spreading is to use options that are less
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deeply in-the-money. In such a case, one must use the deltas of the options in order
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to accurately compute the proper hedge. He would calculate the number of options
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to buy and sell by using the formula given previously for the ratio of the indices,
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which incorporates both price and volatility, and then multiplying by a factor to
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include delta.
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where
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vi is the volatility of index i
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Pi is the price of index i
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ui is the unit of trading
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and di is the delta of the selected option on index i
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Example: The following data is known:
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ZYX: 175.00, volatility= 20%
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UVX: 150.00, volatility = 15%
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ZYX Dec 175 put: 7, delta= - .45, worth $500/pt.
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UVX Dec 150 call: 5, delta= .52, worth $100/pt
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Suppose one decides that he wants to set up a position that will profit if the
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spread between the two cash indices shrinks. Rather than use the deeply in-the
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money options, he now decides to use the at-the-money options. He would use the
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option ratio formula to determine how many puts and calls to buy. (Ignore the put's
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negative delta for the purposes of this formula.)
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.20 175.00 500 .45 Option Ratio= -x ---x - x - = 6 731 .15 150.00 100 .52 .
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He would buy nearly 7 UVX calls for every ZYX put purchased.
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In the previous example, using in-the-money options, one had a very small
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expense for time value premium and could profit if the indices were volatile, even if
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the cash spread did not shrink. This position has a great deal of time value premium
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e:x--pense, but could make profits on smaller moves by the indices. Of course, either
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one could profit if the cash indices moved favorably. |