45 lines
2.3 KiB
Plaintext
45 lines
2.3 KiB
Plaintext
Chapter 20: The Sale of a Straddle
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Option
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Jan 45 call
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Jan 45 put
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Total ESP
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Position
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short 8
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short 8
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Delta
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0.90
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-0.10
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313
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ESP
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short 720 (-8 x .9 x 100)
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long 80 (-8 x -. 1 x 1 00)
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short 640 shares
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Obviously, the position is quite short. Unless the trader were extremely bearish
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on XYZ, he should make an adjustment. The simplest adjustment would be to buy
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600 shares of XYZ. Another possibility would be to buy back 7 of the short January
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45 calls. Such a purchase would add a delta long of 630 shares to the position (7 x .9
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x 100). This would leave the position essentially neutral. As pointed out in the previ
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ous example, however, the strategist may not want to buy that option. If, instead, he
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decided to try to buy the January 50 call to hedge the short straddle, he would have
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to buy 10 of those to make the position neutral. He would buy that many because the
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delta of that January 50 is 0.60; a purchase of 10 would add a delta long of 600 shares
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to the position.
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Even though the purchase of 10 is theoretically correct, since one is only short
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8 straddles, he would probably buy only 8 January 50 calls as a practical matter.
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STARTING OUT WITH THE PROTECTION IN PLACE
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In certain cases, the straddle writer may be able to initially establish a position that
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has no risk in one direction: He can buy an out-of-the-money put or call at the same
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time the straddle is written. This accomplishes the same purposes as the follow-up
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action described in the last few paragraphs, but the protective option will cost less
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since it is out-of-the-money when it is purchased. There are, of course, both positive
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and negative aspects involved in adding an out-of-the-money long option to the strad
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dle write at the outset.
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Example: Given the following prices:
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XYZ, 45;
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XYZ January 45 straddle, 7; and
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XYZ January 50 call, 1 ½,
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the upside risk will be limited. If one writes the January 45 straddle for 7 points and
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buys the January 50 call for 1 ½ points, his overall credit will be 5½ points. He has no
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upside risk in this position, for if XYZ should rise and be over 50 at expiration, he will
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be able to close the position by buying back the call spread for 5 points. The put will
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expire worthless. The out-of-the-money call has eliminated any risk above 50 on the |