49 lines
2.7 KiB
Plaintext
49 lines
2.7 KiB
Plaintext
523
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OPTION TrAdINg STrATegIeS
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Comment. As can be verified by comparing Figure 35.11b to Figure 35.3c, this strategy is virtually
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equivalent to buying an in-the-money call. Supplementing a long futures position with the purchase
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of an out-of-the-money put will result in slightly poorer results if the market advances, or declines
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moderately, but will limit the magnitude of losses in the event of a sharp price decline. Thus, much
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like the long in-the-money call position, this strategy can be viewed as a long position with a built-
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in stop.
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In most cases, it will make more sense for the trader to simply buy an in-the-money call since
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the transaction cost will be lower. However, if a speculator is already long futures, the purchase of
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an out-of-the-money put might present a viable alternative to liquidating this position and buying an
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in-the-money call.
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Strategy 12a: Option-protected Short Futures (Short Futures + Long
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at-the-Money Call)
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example. Sell August gold futures at $1,200/oz and simultaneously buy an August $1,200 gold call
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at a premium of $38.80/oz ($3,880). (See Table 35.12a and Figure 35.12a.)
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Comment. A frequently recommended strategy is that the trader implementing (or holding) a short
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futures position can consider buying a call to protect his upside risk. The basic idea is that if the mar-
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ket advances, the losses in the short futures position will be offset dollar for dollar by the long call
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position. Although this premise is true, it should be stressed that such a combined position represents
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nothing more than a proxy for a long put. The reader can verify the virtually identical nature of these
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two alternative strategies by comparing Figure 35.12a to Figure 35.5a. If prices decline, the short
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futures position will gain, while the option will expire worthless. And if prices advance, the loss in the
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combined position will equal the premium paid for the call. In fact, if the put and call premiums are
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equal, a short futures plus long call position will be precisely equivalent to a long put.
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tabLe 35.12a profit/Loss Calculations: Option-protected Short Futures—Short Futures + Long at-the-
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Money Call (Similar to Long at-the-Money put)
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(1) (2) (3) (4) (5) (6)
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Futures price at
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expiration ($/oz)
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premium of august $1,200
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Call at Initiation ($/oz)
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$ amount of
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premium paid
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profit/Loss on Short
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Futures position
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Call Value at
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expiration
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profit/Loss on position
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[(4)+ (5) – (3)]
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1,000 38.8 $3,880 $20,000 $0 $16,120
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1,050 38.8 $3,880 $15,000 $0 $11,120
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1,100 38.8 $3,880 $10,000 $0 $6,120
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1,150 38.8 $3,880 $5,000 $0 $1,120
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1,200 38.8 $3,880 $0 $0 –$3,880
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1,250 38.8 $3,880 –$5,000 $5,000 –$3,880
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1,300 38.8 $3,880 –$10,000 $10,000 –$3,880
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1,350 38.8 $3,880 –$15,000 $15,000 –$3,880
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1,400 38.8 $3,880 –$20,000 $20,000 –$3,880 |