39 lines
2.2 KiB
Plaintext
39 lines
2.2 KiB
Plaintext
504 Part V: Index Options and Futures
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morning before the next trading day begins. Note that he cannot merely exercise his
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long, since, if he did that, he would then receive the next night's closing price for his
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long. Under the worst scenario, suppose the market receives disappointing econom
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ic news the next day and opens sharply lower - with the index at 172. If he sells his
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long Nov 160 calls at parity ($1,200), he will have paid a debit of $824 - larger than
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his initial, theoretically "limited" maximum debit of $500. Thus he loses $624 on this
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spread ( $824 less the initial credit of $200) - over twice the theoretically limited loss
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of $300.
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If the market should open sharply lower and trade down, he could lose more
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money than he thought because his long position is now exposed - there is no longer
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a spread in place after the short option is assigned. Of course, this could work to his
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advantage if the market rallied the next day. The point is, however, that a spread in
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cash-based options acquires more risk than the difference in the strikes (the maxi
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mum risk in stock options) if the short option in the spread becomes a deeply in-the
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money option, ripe for assignment.
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NAKED MARGIN
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When an index is designated as "broad-based," a lesser margin requirement applies
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to the writer of naked options. The SEC determines which indices are broad-based.
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A broad-based index receives more favorable margin treatment because the under
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lying index will not normally change in price as quickly as a stock or subindex. Thus,
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the naked writer theoretically has less of a risk with a naked broad-based index
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option.
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The requirement for writing a broad-based index option naked is 15% of the
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index, plus the option premium, minus the amount, if any, that the option is out-of
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the-money. There is a minimum requirement: for calls, it is 10% of the index value;
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for puts, it is 10% of the striking price. Both minima are in addition to the option pre
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mium.
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Example: Suppose that the ZYX is at 168.00, with a Dec 170 call selling for 6 and a
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Dec 170 put selling for 5. The requirement for selling the call naked would be cal
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culated as follows:
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15% of index
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Plus call premium
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Less out-of-money amount
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Naked call requirement
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$2,520
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+ 600
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200
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$2,920 |