41 lines
3.0 KiB
Plaintext
41 lines
3.0 KiB
Plaintext
488
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A Complete Guide to the Futures mArket
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There is no single best trading approach. The optimal trading strategy in any given situation will
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depend on the prevailing option premium levels and the specific nature of the expected price sce-
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nario. How does one decide on the best strategy? This chapter will attempt to answer this critical
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question in two steps. First, we will examine the general profit/loss characteristics (profiles) of a
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wide range of alternative trading strategies. Second, we will consider how price expectations can be
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combined with these profit/loss profiles to determine the best trading approach.
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The profit/loss profile is a diagram indicating the profit or loss implied by a position (vertical axis)
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for a range of market prices (horizontal axis). The profit/loss profile provides an ideal means of
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understanding and comparing different trading strategies. The following points should be noted
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regarding the profit/loss profiles detailed in the next section:
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1. All illustrations are based on a single option series, for a single market, on a single date: the
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August 2015 gold options on April 13, 2015. This common denominator makes it easy to com-
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pare the implications of different trading strategies. The choice of April 13, 2015, was not arbi-
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trary. On that date, the closing price of August futures (1,200.20) was almost exactly equal to
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one of the option strike prices ($1,200/oz), thereby providing a nearly precise at-the-money
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option—a factor that greatly facilitates the illustration of theoretical differences among out-of-
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the-money, in-the-money, and at-the-money options. The specific closing values for the option
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premiums on that date were as follows ($/oz):
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Strike price august Calls august puts
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1,050 155.2 5.1
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1,100 110.1 10.1
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1,150 70.1 19.9
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1,200 38.8 38.7
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1,250 19.2 68.7
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1,300 9.1 108.7
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1,350 4.5 154.1
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Option pricing data in this chapter courtesy of OptionVue (www .optionvue.com).
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The reader should refer to these quotes when examining each of the profit/loss profiles in
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the next section.
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2. In order to avoid unnecessarily cluttering the illustrations, the profit/loss profiles do not include
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transaction costs and interest income effects, both of which are very minor. (Note the assump-
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tion that transaction costs equal zero imply that commission costs equal zero and that positions
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can be implemented at the quoted levels—in this case, the market close.)
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3. The profit/loss profiles reflect the situation at the time of the option expiration. This assumption
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simplifies the exposition, since the value of an option can be precisely determined at that point
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in time. At prior times, the value of the option will depend on the various factors discussed in
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the previous chapter (e.g., time until expiration, volatility, etc.). Allowing for an evaluation of
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each option strategy at interim time stages would introduce a level of complexity that would
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place the discussion beyond the scope of this book. However, the key point to keep in mind |