19 lines
1.3 KiB
Plaintext
19 lines
1.3 KiB
Plaintext
From the presented data, is this a good trade? The answer to this question
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is contingent on whether the position John is taking is congruent with his
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view of direction and volatility and what the market tells him about these
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elements.
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John is bullish up to August expiration, and the stock in this example is in
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an uptrend. Any rationale for bullishness may come from technical or
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fundamental analysis, but techniques for picking direction, for the most
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part, are beyond the scope of this book. Buying the lower strike in the
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February option gives this trade a more positive delta than a straight
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calendar spread would have. The trader’s delta is 0.255, or the equivalent of
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about 25.5 shares of Apple. This reflects the trader’s directional view.
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The volatility is not as easy to decipher. A specific volatility forecast was
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not stated above, but there are a few relevant bits of information that should
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be considered, whether or not the trader has a specific view on future
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volatility. First, the historical volatility is 28 percent. That’s lower than
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either the January or the February calls. That’s not ideal. In a perfect world,
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it’s better to buy below historical and sell above. To that point, the February
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option that John is buying has a higher volatility than the January he is
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selling. Not so good either. Are these volatility observations deal breakers? |