28 lines
1.5 KiB
Plaintext
28 lines
1.5 KiB
Plaintext
objectives are met more efficiently by buying the spread. The goal is to
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profit from the delta move down from $80 to $75. Exhibit 9.8 shows the
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differences between the greeks of the outright put and the spread when the
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trade is put on with ExxonMobil at $80.55.
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EXHIBIT 9.8 ExxonMobil put vs. bear put spread (ExxonMobil @
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$80.55).
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80 Put75–80 Put
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Delta −0.445−0.300
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Gamma+0.080+0.041
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Theta −0.018−0.006
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Vega +0.110+0.046
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As in the call-spread examples discussed previously, the spread delta is
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smaller than the outright put’s. It appears ironic that the spread with the
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smaller delta is a better trade in this situation, considering that the intent is
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to profit from direction. But it is the relative differences in the greeks
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besides delta that make the spread worthwhile given the trader’s goal.
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Gamma, theta, and vega are proportionately much smaller than the delta in
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the spread than in the outright put. While the spread’s delta is two thirds
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that of the put, its gamma is half, its theta one third, and its vega around 42
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percent of the put’s.
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Retracements such as the one called for by the trader in this example can
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happen fast, sometimes over the course of a week or two. It’s not
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necessarily bad if this move occurs quickly. If ExxonMobil drops by $5
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right away, the short delta will make the position profitable. Exhibit 9.9
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shows how the spread position changes as the stock declines from $80 to
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$75.
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EXHIBIT 9.9 75–80 bear put spread as ExxonMobil declines.
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