47 lines
2.7 KiB
Plaintext
47 lines
2.7 KiB
Plaintext
543
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OPTION TrAdINg STrATegIeS
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strategies. One critical point that must be emphasized regarding option spreads is that these
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strategies are normally subject to a major disadvantage: the transaction costs (commissions plus
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cumulative bid/asked spreads) for these trades are relatively large compared to the profit poten-
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tial. This consideration means that the option spread trader must be right a large percentage of
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the time if he is to come out ahead of the game. The importance of this point cannot be overem -
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phasized. In short, as a generalization, other option strategies will usually offer better trading
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opportunities.
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Multiunit Strategies
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The profit/loss profile can also be used to analyze multiple-unit option strategies. In fact, multiple-
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unit option positions may often provide the more appropriate strategy for purposes of comparison.
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For example, as previously detailed, a long futures position is more volatile than a long or short call
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position. In fact, for small price changes, each $1 change in a futures price will only result in approxi-
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mately a $0.50 change in the call price (the delta value for an at-the-money call is approximately
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equal to 0.5). As a result, in considering the alternatives of buying futures and buying calls, it probably
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makes more sense to compare the long futures position to two long calls (see Table 35.22) as opposed
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to one long call.
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Figure 35.22 compares the strategies of long futures versus long two calls, which at the time of
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initiation are approximately equivalent in terms of delta values. Note this comparison indicates that
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the long futures position is preferable if prices change only moderately, but that the long two-call
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position will gain more if prices rise sharply, and lose less if prices decline sharply. In contrast, the
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comparison between long futures and a long one-call position would indicate that futures provide
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the better strategy in the event of a price advance of any magnitude (see Figure 35.3d). For most
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purposes, the comparison employing two long calls will be more meaningful because it comes much
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closer to matching the risk level implicit in the long futures position.
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tabLe 35.22 profit/Loss Calculations: Long two at-the-Money Calls
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(1) (2) (3) (4) (5)
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Futures price at
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expiration ($/oz)
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premium of august
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$1,200 Call ($/oz)
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$ amount of total
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premium paid
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Value of 2 Calls
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at expiration
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profit/Loss on
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position [(4) − (3)]
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1,000 38.8 $7,760 $0 –$7,760
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1,050 38.8 $7,760 $0 –$7,760
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1,100 38.8 $7,760 $0 –$7,760
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1,150 38.8 $7,760 $0 –$7,760
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1,200 38.8 $7,760 $0 –$7,760
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1,250 38.8 $7,760 $10,000 $2,240
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1,300 38.8 $7,760 $20,000 $12,240
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1,350 38.8 $7,760 $30,000 $22,240
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1,400 38.8 $7,760 $40,000 $32,240 |