38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
546 Part V: Index Options and Futures
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Example: In the last example, the March 180 put had a delta of -0.60. The March
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180 call should then have a delta of 0.40. If the portfolio manager wanted to hedge
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his portfolio by ratio writing calls against it, he could use the same formula as in the
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previous example:
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Calls to sell = $720,000 I (100 x 180) I 0.40 = 100
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He would sell 100 calls to hedge his portfolio.
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Adjustments would be made in much the same manner as those that a straddle
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seller would make. If the market rises, the delta of the calls will increase and the posi
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tion will be delta short. One would probably buy calls in that case. Follow-up action
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for an actual short straddle might dictate buying in some of the underlying security
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rather than buying the calls, but that is not a realistic alternative in this case, since the
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sample portfolio is probably stable.
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If, on the other hand, the market declined after the short calls were sold against
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the portfolio, the position would become delta long as the delta of the calls shrinks.
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The normal action in that case would be to roll the calls down and reestablish the
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proper amount of protection for the portfolio.
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Overall, hedging the portfolio with short index calls does not present as attrac
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tive a position as hedging with long index puts. This is due mostly to the nature of
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what the portfolio manager is trying to accomplish, as opposed to the relative merits
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of long and short straddles. As was pointed out in previous chapters, straddle selling,
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while risky, is an excellent strategy on a statistical basis. However, in this section we
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are not dealing with a strategist who is going to go out and buy stocks and then write
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index calls against them. Rather, we have an existing portfolio and the portfolio man
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ager is becoming bearish on the market. Thus, the stock portfolio is a fixed entity and
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the index options or futures are being built around it for protection.
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Long puts serve the purpose of protection far better than short calls, for the fol
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lowing reasons. First, the types of adjustments that need to be made by a straddle
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seller often involve buying stock or at least buying relatively deep in-the-money calls.
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A portfolio manager or investor holding a portfolio stock may not need or want to get
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involved in a multi-optioned position. Second, with calls there is large risk to the
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upside in case of a large market rally. Someone holding a portfolio of stocks might be
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willing to forego upside profits ( as in the sale of futures), but generally would be quite
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upset to sustain large losses on the upside. Using puts, of course, leaves room for
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upside profit potential. Third, there is risk of early assignment with short index calls,
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although that is of minor significance in this case since the portfolio of stocks would
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have been long in any case. Other calls could be written immediately on the day after
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the assignment. The only real drawback to using the puts is that premium dollars are |