46 lines
2.5 KiB
Plaintext
46 lines
2.5 KiB
Plaintext
Chapter 40: Advanced Concepts
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XYZ:90
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Position
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Sold 100 July 90 calls
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Sold 1 00 July 90 puts
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Option
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Delto
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0.56
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0.43
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Position
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Delta
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-5,600
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+4,300
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873
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1,300 shares
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These examples demonstrate how quickly a large position, such as being short
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100 straddles, can acquire a large delta as the stock moves even a small distance.
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Extrapolating the moves is not completely correct, because the gamma changes as
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the stock price changes, but it can give the trader some feel for how much his delta
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will change.
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It is often useful to calculate this information in advance, to some point in the
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near future. Figure 40-10 depicts what the delta of this large short straddle position
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will be, two weeks after it was first sold. The points on the horizontal axis are stock
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prices. The quickness with which the neutrality of the position disappears is alarm
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ing. A small move up to 93 - only one standard deviation - in two weeks makes the
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overall position short the equivalent of about 3,300 shares of XYZ. Figure 40-10 real
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ly shows nothing more than the effect that gamma is having on the position, but it is
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presented in a form that may be preferable for some traders.
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What this means is that the position is "fighting" the market: As the market goes
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up, this position becomes shorter and shorter. That can be an unpleasant situation,
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both from the point of view of creating unrealized losses as well as from a psycho
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logical viewpoint. The position delta and gamma can be used to estimate the amount
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of unrealized loss that will occur: Just how much can this position be expected to lose
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if there is a quick move in the underlying stock? The answer is quickly obtained from
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the delta and gamma: With the first point that XYZ moves, from 88 to 89, the posi
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tion acts as if it is short 100 shares (the position delta), so it would lose $100. With
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the next point that XYZ rises, from 89 to 90, the position will act as if it is short the
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original 100 shares (the position delta), plus another 600 shares (the position
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gamma). Hence, during that second point of movement by XYZ, the entire position
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will act as if it is short 700 shares, and therefore lose another $700. Therefore, an
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immediate 2-point jump in XYZ will cause an unrealized loss of $800 in the position.
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Summarizing:
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Loss, first point of stock movement = position delta
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Loss, second point of stock movement = position delta + gamma
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Total loss for 2 points of stock movement
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= 2 x position delta + position gamma |