22 lines
1.3 KiB
Plaintext
22 lines
1.3 KiB
Plaintext
Managing an Income-Generating
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Calendar
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Let’s say that instead of trading a one-lot calendar, Richard trades it 20
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times. His trade in this case is
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His total cash outlay is $1,600 ($80 times 20). The greeks for this trade,
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listed in Exhibit 11.5 , are also 20 times the size of those in Exhibit 11.3 .
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EXHIBIT 11.5 20-Lot Bed Bath & Beyond January–February 57.50 call
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calendar.
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Note that Richard has a +0.18 delta. This means he’s long the equivalent
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of about 18 shares of stock—still pretty flat. A gamma of −0.72 means that
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if Bed Bath & Beyond moves $1 higher, his delta will be starting to get
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short; and if it moves $1 lower he will be longer, long 90 deltas.
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Richard can use the greeks to get a feel for how much the stock can move
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before negative gamma causes a loss. If Bed Bath & Beyond starts trending
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in either direction, Richard may need to react. His plan is to cover his deltas
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to continue the position.
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Say that after one week Bed Bath & Beyond has dropped $1 to $56.50.
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Richard will have collected seven days of theta, which will have increased
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slightly from $18 per day to $20 per day. His average theta during that time
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is about $19, so Richard’s profit attributed to theta is about $133.
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With a big-enough move in either direction, Richard’s delta will start
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working against him. Since he started with a delta of +0.18 on this 20-lot |