37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads 709
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the profit or loss that would be made by an intramarket soybean spreader who bought
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May and sold March at the initial prices of 598 and 594, respectively. The calendar
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spread generally outperforms the intramarket spread for the prices shown in this
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example. This is where the true theoretical advantage of the calendar spread comes
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in. So, if one is thinking of establishing an intrarnarket spread, he should check out
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the calendar spread in the futures options first. If the options have a theoretical pric
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ing advantage, the calendar spread may clearly outperform the standard intramarket
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spread.
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Study Table 35-4 for a moment. Note that the intramarket spread is only better
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when prices drop but the spread widens (lower left comer of table). In all other
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cases, the calendar spread strategy is better. One could not always expect this to be
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true, of course; the results in the example are partly due to the fact that the March
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options that were sold were relatively expensive when compared with the May
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options that were bought.
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In summary, the futures option calendar spread is more complicated when
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compared to the simpler stock or index option calendar spread. As a result, calendar
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spreading with futures options is a less popular strategy than its stock option coun
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terpart. However, this does not mean that the strategist should overlook this strate
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gy. As the strategist knows, he can often find the best opportunities in seemingly
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complex situations, because there may be pricing inefficiencies present. This strate
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gy's main application may be for the intramarket spreader who also understands the
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usage of options.
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LONG COMBINATIONS
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Another attractive use of options is as a substitute for two instruments that are being
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traded one against the other. Since intermarket and intramarket futures spreads
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involve two instruments being traded against each other, futures options may be able
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to work well in these types of spreads. You may recall that a similar idea was pre
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sented with respect to pairs trading, as well as certain risk arbitrage strategies and
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index futures spreading.
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In any type of futures spread, one might be able to substitute options for the
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actual futures. He might buy calls for the long side of the spread instead of actually
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buying futures. Likewise, he could sell calls or buy puts instead of selling futures for
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the other side of the spread. In using options, however, he wants to avoid two prob
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lems. First, he does not want to increase his risk. Second, he does not want to pay a
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lot of time value premium that could waste away, costing him the profits from his
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spread. |