38 lines
2.0 KiB
Plaintext
38 lines
2.0 KiB
Plaintext
Chapter 40: Advanced Concepts 867
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TABLE 40·8.
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General risk exposure of common strategies.
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Strategy Delta Gamma Theta Vega RHo
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Buy stock + 0 0 0 0
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Sell stock short 0 0 0 0
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Call buy + + + +
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Put buy + +
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Straddle buy 0 + + +
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Covered write + +
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Naked call sale +
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Naked put sale + + +
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Ratio write
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(straddle sale) 0 +
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Calendar spread 0 + +
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Bull spread + +
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Bear spread +
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Ratio call spread 0 +
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Ratio put spread 0 + +
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As might be expected, spread strategies involving both long and short options are
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less easily quantified than outright buys or sells. The calendar spread strategy is one
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in which the spreader does not want a lot of stock movement - he would prefer the
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underlying security to remain near the striking price, for that is the area of maximum
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profit potential. This is reflected by the fact that gamma is negative. Also, for calendar
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spreads, the passage of time is good, a fact that is reflected by the fact that theta is pos
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itive. Finally, since an increase in implied volatilities or interest rates would boost
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prices and widen the spread (creating a profit), vega is positive and rho is negative.
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A bull spread has positive delta, reflecting the bullish nature of the spread, but
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it has negative gamma. The reason gamma is negative is that the position becomes
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less bullish as the underlying security rises, since the profit potential, and hence the
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bullishness of the position, is limited. For similar reasons, a bear spread has negative
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delta (reflecting bearishness) and negative gamma (reflecting limited bearishness).
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Both the bull spread and the bear spread are the same with respect to the other risk
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measurements: Theta is negative, reflecting the fact that time decay can hurt the
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spread. Less obvious is the fact that these spreads are hurt by an increase in per
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ceived volatility; a negative vega tells us this is true, however.
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These risk measurement tools are important in that they can quite graphically
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depict the risk and reward characteristics of an option position or option portfolio. |