34 lines
2.1 KiB
Plaintext
34 lines
2.1 KiB
Plaintext
Furthermore, she realizes that her outlook may be wrong: Johnson &
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Johnson may decline. She may have to close the position early—maybe for
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a profit, maybe for a loss. Stacie also needs to study her greeks. Exhibit 5.5
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shows the greeks for this trade.
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EXHIBIT 5.5 Greeks for short Johnson & Johnson 65 put (per contract).
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Delta 0.65
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Gamma−0.15
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Theta 0.02
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Vega −0.07
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The first item to note is the delta. This position has a directional bias. This
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bias can work for or against her. With a positive 0.65 delta per contract, this
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position has a directional sensitivity equivalent to being long around 650
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shares of the stock. That’s the delta × 100 shares × 10 contracts.
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Stacie’s trade is not just a bullish version of Brendan’s. Partly because of
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the size of the delta, it’s different—specific directional bias aside. First, she
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will handle her trade differently if it is profitable.
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For example, if over the next week or so Johnson & Johnson rises $1,
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positive delta and negative gamma will have a net favorable effect on
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Stacie’s profitability. Theta is small in comparison and won’t have too much
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of an effect. Delta/gamma will account for a decrease in the put’s
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theoretical value of about $0.73. That’s the estimated average delta times
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the stock move, or [0.65 + (–0.15/2)] × 1.00.
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Stacie’s actual profit would likely be less than 0.73 because of the bid-ask
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spread. Stacie must account for the fact that the bid-ask is 0.05 wide (1.75–
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1.80). Because Stacie would buy to close this position, she should consider
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the 0.73 price change relative to the 1.80 offer, not the 1.75 trade price—
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that is, she factors in a nickel of slippage. Thus, she calculates, that the puts
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will be offered at 1.07 (that’s 1.80 − 0.73) when the stock is at $65. That is
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a gain of $0.68.
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In this scenario, Stacie should consider the Would I Do It Now? rule to
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guide her decision as to whether to take her profit early or hold the position
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until expiration. Is she happy being short ten 65 puts at 1.07 with Johnson
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& Johnson at $65? The premium is lower now. The anticipated move has
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already occurred, and she still has 28 days left in the option that could allow |