43 lines
2.3 KiB
Plaintext
43 lines
2.3 KiB
Plaintext
506
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A Complete Guide to the Futures mArket
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It should be emphasized that the futures price need not necessarily reach the strike price in order
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for the out-of-the-money put to be profitable. If the market declines quickly, the put will increase in
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value, and hence can be resold at a profit. (However, this behavior will not necessarily hold for slow
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price declines, since the depressant effect of the passage of time on the option premium could well
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more than offset the supportive effect of the decreased price level of futures.)
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For small price changes, the out-of-the-money put will change by less than a factor of one-half for
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each dollar change in the futures price. Thus, for small price changes, each short futures position will
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be equivalent to several short out-of-the-money puts in terms of risk.
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Strategy 5c: Long put (In-the-Money)
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example. Buy August $1,300 gold futures put at a premium of $108.70/oz ($10,870), with August
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gold futures trading at $1,200/oz. (See Table 35.5c and Figure 35.5c.)
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Comment. In many respects, a long in-the-money put option is very similar to a short futures posi-
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tion. The three main differences between these two trading strategies are:
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1. The short futures position will gain slightly more in the event of a price decline—an amount
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equal to the time value portion of the premium paid for the option ($870 in this example).
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2. For moderate price advances, the short futures position will lose slightly less. (Once again, the
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difference will be equal to the time value portion of the premium paid for the option.)
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3. In the event of a large price advance, the loss on the in-the-money long put position would be
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limited to the total option premium paid, while the loss on the short futures position would be
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unlimited.
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tabLe 35.5c profit/Loss Calculations: Long put (In-the-Money)
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(1) (2) (3) (4) (5)
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Futures price at
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expiration ($/oz)
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premium of august $1,300
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put at Initiation ($/oz)
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Dollar amount
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of premium paid
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Value of put
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at expiration
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profit/Loss on
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position [(3) – (4)]
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1,000 108.7 $10,870 $30,000 $19,130
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1,050 108.7 $10,870 $25,000 $14,130
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1,100 108.7 $10,870 $20,000 $9,130
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1,150 108.7 $10,870 $15,000 $4,130
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1,200 108.7 $10,870 $10,000 –$870
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1,250 108.7 $10,870 $5,000 –$5,870
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1,300 108.7 $10,870 $0 –$10,870
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1,350 108.7 $10,870 $0 –$10,870
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1,400 108.7 $10,870 $0 –$10,870 |