36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
Chapter 33: Mathematical Considerations for Index Products 649
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son for this is that the spread will have different outcomes not only based on the price
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of one index, but also based on that index's relationship to the other index.
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It is possible, for example, that a mildly bullish strategy implemented as an
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inter-index spread might actually lose money even if one index rose. This could hap
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pen if the other index performed in a manner that was not desirable. If one could
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have his computer "draw" a picture of several different outcomes, he would have a
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better idea of the profit potential of his strategy.
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Example: Assume a put spread between the ZYX and the ABX indices was estab
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lished. An ABX June 180 put was bought at 3.00 and a ZYX June 175 put was sold at
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3.00, when the ZYX was at 175.00 and the ABX Index was at 178.00. This spread will
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obviously have different outcomes if the prices of the ZYX and the ABX move in dra
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matically different patterns.
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On the surface, this would appear to be a bearish position - long a put at a high
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er strike and short a put at a lower strike. However, the position could make money
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even in a rising market if the indices move appropriately: If, at expiration, the ZYX
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and ABX are both at 179.00, for example, then the short option expires worthless and
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the long option is still worth 1.00. This would mean that a 1-point profit, or $500, was
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made in the spread ($1,500 profit on the short ZYX puts less a $1,000 loss on the one
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ABX put).
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Conversely, a downward movement doesn't guarantee profits either. If the ZYX
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falls to 170.00 while the ABX declines to 175.00, then both puts would be worth 5 at
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expiration and there would be no gain or loss in the spread.
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What the strategist needs in order to better understand his position is a "sliding scale"
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picture. That is, most follow-up pictures give the outcome (say, at expiration) of the
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position at various stock or index prices. That is still needed: One would want to see
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the outcome for ZYX prices of, say, 165 up to 185 in the example. However, in this
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spread something else is needed: The outcome should also take into account how the
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ZYX matches up with the ABX. Thus, one might need three (or more) tables of out
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comes, each of which depicts the results as ZYX ranges from 165 up to 185 at expi
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ration. One might first show how the results would look if ZYX were, say, 5 points
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below ABX; then another table would show ZYX and ABX unchanged from their
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original relationship (a 3-point differential); finally, another table would show the
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results if ZYX and ABX were equal at expiration.
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If the relationship between the two indices were at 3 points at expiration, such
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a table might look like this: |