25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
Chapter 12: Combining Calendar and Ratio Spreads
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FOLLOW-UP ACTION
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229
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If one decides to preserve a neutral strategy with follow-up action in either type of
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ratio call calendar, he would merely need to look at the deltas of the calls and keep
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the ratio neutral. Doing so might mean that one would switch from one type of cal
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endar spread to the other, from the out-of-the-money with naked calls to the in-the
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money with extra long calls, or vice versa. For example, if XYZ started at 45, as in the
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first example, one would have sold more calls than he bought. If XYZ then rallied
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above 50, he would have to move his position into the in-the-money ratio and get
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long more calls than he is short.
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While such follow-up action is strategically correct maintaining the neutral
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ratio - it might not make sense practically, especially if the size of the original spread
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were small. If one had originally sold 5 and bought 3, he would be better to adhere
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to the follow-up strategy outlined earlier in this chapter. The spread is not large
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enough to dictate adjusting via the delta-neutral ratios. If, however, a large trader had
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originally sold 500 calls and bought 300, then he has enough profitability in the
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spread to make several adjustments along the way.
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In a similar manner, the spreader who had established a small in-the-money cal
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endar might decide not to bother rationing the spread if the stock dropped below the
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strike. He knows his risk is limited to his initial debit, and that would be small for a
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small spread. He might not want to introduce naked options into the position if XYZ
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declines. However, if the same spread were established by a large trader, it should be
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adjusted because of the greater tolerance of the spread to being adjusted, merely
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because of its size. |