25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
example, this 1:2 contract backspread has a delta of −0.02 and a gamma of
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+0.05. Fewer than 10 deltas could be scalped if the stock moves up and
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down by one point. It becomes a more practical trade as the position size
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increases. Of course, more practical doesn’t necessarily guarantee it will be
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more profitable. The market must cooperate!
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Backspread Example
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Let’s say a 20:40 contract backspread is traded. (Note : In trader lingo this is
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still called a one-by-two; it is just traded 20 times.) The spread price is still
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1.00 credit per contract; in this case, that’s $2,000. But with this type of
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trade, the spread price is not the best measure of risk or reward, as it is with
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some other kinds of spreads. Risk and reward are best measured by delta,
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gamma, theta, and vega. Exhibit 16.2 shows this trade’s greeks.
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EXHIBIT 16.2 Greeks for 20:40 backspread with the underlying at $71.
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Backspreads are volatility plays. This spread has a +1.07 vega with the
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stock at $71. It is, therefore, a bullish implied volatility (IV) play. The IV of
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the long calls, the 75s, is 30 percent, and that of the 70s is 32 percent. Much
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as with any other volatility trade, traders would compare current implied
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volatility with realized volatility and the implied volatility of recent past
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and consider any catalysts that might affect stock volatility. The objective is
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to buy an IV that is lower than the expected future stock volatility, based on
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all available data. The focus of traders of this backspread is not the dollar
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credit earned. They are more interested in buying a 30 volatility—that’s the
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focus.
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But the 75 calls’ IV is not the only volatility figure to consider. The short
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options, the 70s, have implied volatility of 32 percent. Because of their |