38 lines
2.2 KiB
Plaintext
38 lines
2.2 KiB
Plaintext
Chapter 40: Advanced Concepts
|
||
Using deltas, the following spread appears to be neutral:
|
||
Buy l January bean 57 5 call at 19 .50
|
||
Sell 6 January bean 675 calls at 2.25
|
||
Net position:
|
||
19.50 DB
|
||
13.50 CR
|
||
6 Debit
|
||
879
|
||
At the time the original example was presented, it was demonstrated through
|
||
the use of the profit picture that the ratio was too steep and problems could result in
|
||
a large rally.
|
||
Now that one has the concept of gamma at his disposal, he can quantify what
|
||
those problems are.
|
||
The position gamma of this spread is quite negative:
|
||
Position gamma = .01 - 6 x .0026 = -0.0056
|
||
That is, for every 10 points that January soybeans rally, the position will become
|
||
short about 1/2 of one futures contract. The maximum profit point, 675, is 92 points
|
||
above the current price of 583. While beans would not normally rally 92 points in
|
||
only a few days, it does demonstrate that this position could become very short if
|
||
beans quickly rallied to the point of maximum profit potential. Rest assured there
|
||
would be no profit if that happened.
|
||
Even a small rally of 20 cents (points) in soybeans - less than the daily limit -
|
||
would begin to make this tiny spread noticeably short. If one had established the
|
||
spread in some quantity, say buying 100 and selling 600, he could become seriously
|
||
short very fast.
|
||
A neutral spreader would not use such a large ratio in this spread. Rather, he
|
||
would neutralize the gamma and then attempt to deal with the resulting delta. The
|
||
next section deals with ways to accomplish that.
|
||
CREATING MULTIFACETED NEUTRALITY
|
||
So what is the strategist to do? He can attempt to construct positions that are neutral
|
||
with respect to the other factors if he perceives them as a risk. There is no reason why
|
||
a position cannot be constructed as veg a neutral rather than delta neutral, if he wants
|
||
to eliminate the risk of volatility increases or decreases. Or, maybe he wants to elim
|
||
inate the risk of stock price movements, in which case he would attempt to be gamma
|
||
neutral as well as delta neutral.
|
||
This seems like a simple concept until one first attempts to establish a position
|
||
that is neutral with respect to more than one risk variable. For example, if one is |