42 lines
2.4 KiB
Plaintext
42 lines
2.4 KiB
Plaintext
614 Part V: Index Options and Futurei
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retical cash value. He is not too eager to sell at such a discount, but he realizes tha
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he has a lot of exposure between the current price and the guarantee price of 10.
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He might consider writing a listed call against his position. That would conver
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it into the equivalent of a bull spread, since he already holds the equivalent of a lonf
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call via ownership of the structured product. Suppose that he quotes the $SP)
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options that trade on the CBOE and finds the following prices for 6-month options
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expiring in December:
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$SPX: 1,200
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Option
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December 1,200 call
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December 1,250 call
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December 1,300 call
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Price
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85
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62
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43
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Suppose that he likes the sale of the December 1,250 call for 62 points. How
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many should he sell against his position in order to have a proper hedge?
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First, one must compute a multiplier that indicates how many shares of the
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structured product are equivalent to one "share" of the $SPX. That is done in the
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simple case by dividing the striking price by the guarantee price:
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Multiplier = Striking price/ Base price
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= 700 / 10 = 70
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This means that buying 70 shares of the structured product is equivalent to
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being long one share of $SPX. To verify this, suppose that one had bought 70 shares
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of the structured product initially at a price of 10, when $SPX was at 700. Later,
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assume that $SPX doubles to 1,400. With the simple structure of this product, which
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has a 100% participation rate and no adjustment factor, it should also double to 20.
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So 70 shares bought at 10 and sold at 20 would produce a profit of $700. As for $SPX,
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one "share" bought at 700 and later sold at 1,400 would also yield a profit of $700.
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This verifies that the 70-to-l ratio is the correct multiplier.
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This multiplier can then be used to figure out the current equivalent structured
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product position in terms of $SPX. Recall that the investor had bought 15,000 shares
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initially. Since the multiplier is 70-to-l, these 15,000 shares are equivalent to:
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$SPX equivalent shares = Shares of structured product held/ Multiplier
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= 15,000 / 70 = 214.29
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That is, owning this structured product is the equivalent of owning 214+ shares
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of $SPX at current prices. Since an $SPX call option is an option on 100 "shares" of
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$SPX, one would write 2 calls (rounding off) against his structured profit position.
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Since the SPX December 1,250 calls are selling for 62, that would bring in $12,400
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less commissions. |