38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 40: Advanced Concepts 891
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Figure 40-14 depicts the fact that gamma is not very stable, considering that it
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started at nearly zero. If XYZ falls, gamma increases a little, reflecting the fact that
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the position will get somewhat shorter as XYZ falls. But since there are only calls cou
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pled with short stock in this position, there is no risk to the downside. Positive
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gamma, even a small positive gamma like this one, is beneficial to stock movement.
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The upside is another matter entirely. The gamma begins to become seriously
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negative above a stock price of 63 in 7 days. Recall that negative gamma means that
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one's position is about to react poorly to price changes in the market - the position
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will soon be "fighting the market." As the stock goes even higher, the gamma
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becomes even more negative. These observations apply to stock price movements in
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either 7 days or 14 days; in fact, the effect on gamma does not seem to be particu
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larly dependent on time in this example, since the two lines on Figure 40-15 are very
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close to each other.
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The above information depicts in detailed form the fact that this position will
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not behave well if the stock rises too far in too short a time. However, stable stock
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prices will produce profits, as will falling prices. These are not earth-shattering con
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clusions since, by simple observation, one can see that there are extra short calls plus
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some short stock in the position. However, the point of calculating this information
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in advance is to be able to anticipate where to make adjustments and how much to
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adjust.
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Follow-Up Action. How should the strategist use this information? A sim
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plistic approach is to adjust the delta as it becomes non-neutral. This won't do
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anything for gamma, however, and may therefore not necessarily be the best
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approach. If one were to adjust only the delta, he would do it in the following
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manner: The chart of delta (Figure 40-13) shows that the position will be
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approximately delta short 800 shares if XYZ rises to 64.50 in a week. One sim
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ple plan would be to cover the 800 shares of XYZ that are short if the stock rises
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to 64.50. Covering the 800 shares would return the position to delta neutral at
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that time. Note that if the stock rises at a slower pace, the point at which the
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strategist would cover the 800 shares moves higher. For example, the delta in 14
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days (again in Figure 40-13) shows that XYZ would have to be at about 65.50 for
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the position to be delta short 800 shares. Hence, if it took two weeks for XYZ to
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begin rising, one could wait until 65.50 before covering the 800 shares and
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returning the position to delta neutral.
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In either case, the purchase of the 800 shares does not take care of the negative
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gamma that is creeping into the position as the stock rises. The only way to counter
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negative gamma is to buy options, not stock. To return a position to neutrality with |