70 lines
1.8 KiB
Plaintext
70 lines
1.8 KiB
Plaintext
682 Part V: Index Options and Futures
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The real value in being able to use the options when a future is locked limit up
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or limit down, of course, is to be able to hedge one's position. Simplistically, if a trad
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er came in long the August soybean futures and they were locked limit down as in
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the example above, he could use the puts and calls to effectively close out his posi
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tion.
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Example: As before, August soybeans are at 620, locked down the limit of 30 cents.
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A trader has come into this trading day long the futures and he is very worried. He
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cannot liquidate his long position, and if soybeans should open down the limit again
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tomorrow, his account will be wiped out. He can use the August options to close out
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his position.
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Recall that it has been shown that the following is true:
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Long put + Short call is equivalent to short stock.
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It is also equivalent to short futures, of course. So if this trader were to buy a
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put and short a call at the same strike, then he would have the equivalent of a short
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futures position to offset his long futures position.
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Using the following prices, which are the same as before, one can see how his
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risk is limited to the effective futures price of 613. That is, buying the put and selling
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the call is the same as selling his futures out at 613, down 37 cents on the trading day.
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Current prices:
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Option
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August 625 call
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August 625 put
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Position:
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Buy August 625 put for 19
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Sell August 625 call for 31
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August Futures
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at Option
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Expiration Put Price
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575 50
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600 25
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613 12
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625 0
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650 0
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Put
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P/L
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+ $1,900
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600
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- 1,900
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- 3,100
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3,100
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Last Sale
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Price
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19
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31
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Call Price
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0
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0
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0
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0
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25
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Call
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P/L
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+$1,900
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+ 1,900
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+ 1,900
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+ 1,900
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600
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Net Change
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for the Day
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-21
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+16
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Net Profit
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or loss on
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Position
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+$3,800
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+ 1,300
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0
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- 1,200
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- 3,700 |