39 lines
2.0 KiB
Plaintext
39 lines
2.0 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads
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June T-bill 9450 calls: 0.32
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June Euro$ 9450 puts: 0.40
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713
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The TED spread, basis June, is currently at 0.60 (the difference in price of the
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two futures). Both futures have in-the-money options with only a small amount of
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time value premium in them.
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The June T-bill calls with a striking price of 94.50 are 0.25 in the money and are
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selling for 0.32. Their time value premium is only 0.07 points. Similarly, the June
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Eurodollar puts with a striking price of 94.50 are 0.35 in the money and are selling
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for 0.40. Hence, their time value premium is 0.05.
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Since the total time value premium - 0.12 ($300) - is small, the strategist
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decides that the option spread may have an advantage over the futures intermarket
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spread, so he establishes the following position:
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Buy one June T-bill call @ 0.40
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Buy one June Euro$ put @ 0.32
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Total cost:
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Cost
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$1,000
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$ 800
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$1,800
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Later, financial conditions in the world are very stable and the TED spread
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begins to shrink. However, at the same time, rates are being lowered in the United
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States, and T-bill and Eurodollar prices begin to rally substantially. In May, when the
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June T-bill options expire, the following prices exist:
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June T-bill futures: 95.50
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June Euro$ futures: 95.10
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June T-bill 9450 calls: 1.00
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June Euro$ 9450 puts: 0.01
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The TED spread has shrunk from 0.60 to only 0.40. Thus, any trader attempt
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ing to buy the TED spread using only futures would have lost $500 as the spread
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moved against him by 0.20.
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However, look at the option position. The options are now worth a combined
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value of 1.01 points ($2,525), and they were bought for 0.72 points ($1,800). Thus,
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the option strategy has turned a profit of $725, while the futures strategy would have
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lost money.
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Any traders who used this option strategy instead of using futures would have
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enjoyed profits, because as the Federal Reserve lowered rates time after time, the
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prices of both T-bills and Eurodollars rose far enough to make the option strategist's |