37 lines
2.6 KiB
Plaintext
37 lines
2.6 KiB
Plaintext
714 Part V: Index Options and Futures
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calls more profitable than the loss in his puts. This is the advantage of using in-the
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money options instead of futures in futures spreading strategies.
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In fairness, it should be pointed out that if the futures prices had remained rel
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atively unchanged, the 0.12 points of time value premium ($300) could have been
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lost, while the futures spread may have been relatively unchanged. However, this
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does not alter the reasoning behind wanting to use this option strategy.
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Another consideration that might come into play is the margin required. Recall
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that the initial margin for implementing the TED spread was $400. However, if one
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uses the option strategy, he must pay for the options in full - $1,800 in the above
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example. This could conceivably be a deterrent to using the option strategy. Of
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course, if by investing $1,800, one can make money instead of losing money with the
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smaller investment, then the initial margin requirement is irrelevant. Therefore, the
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profit potential must be considered the more important factor.
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FOLLOW-UP CONSIDERATIONS
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When one uses long option combinations to implement a futures spread strategy, he
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may find that his position changes from a spread to more of an outright position. This
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would occur if the markets were volatile and one option became deeply in-the
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money, while the other one was nearly worthless. The TED spread example above
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showed how this could occur as the call wound up being worth 1.00, while the put
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was virtually worthless.
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As one side of the option spread goes out-of-the-money, the spread nature
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begins to disappear and a more outright position takes its place. One can use the
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deltas of the options in order to calculate just how much exposure he has at any one
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time. The following examples go through a series of analyses and trades that a strate
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gist might have to face. The first example concerns establishing an intermarket
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spread in oil products.
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Example: In late summer, a spreader decides to implement an intermarket spread.
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He projects that the coming winter may be severely cold; furthermore, he believes
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that gasoline prices are too high, being artificially buoyed by the summer tourist sea
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son, and the high prices are being carried into the future months by inefficient mar
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ket pricing.
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Therefore, he wants to buy heating oil futures or options and sell unleaded
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gasoline futures or options. He plans to be out of the trade, if possible, by early
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December, when the market should have discounted the facts about the winter.
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Therefore, he decides to look at January futures and options. The following prices
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exist: |