47 lines
2.4 KiB
Plaintext
47 lines
2.4 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads 717
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Example: The strategist decides that, since his goal was for the futures spread to
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widen to 12 cents, he will not remove the position when the spread is only 8 cents,
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as it is now. However, he wants to take some action to protect his current profit, while
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still retaining the possibility to have the profit expand.
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As a first step, the equivalent futures position (EFP) is calculated. The pertinent
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data is shown in Table 35-5.
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TABLE 35-5.
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EFP of long combination.
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Future or Option
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January heating oil futures:
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January unleaded gasoline futures:
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January heating oil 60 call: Long 5
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January unleaded gas 62 put: Long 5
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Price
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.7100
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.6300
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11.05
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1.50
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Delta
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0.99
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-0.40
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EFP
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+4.95
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-2.00
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Total EFP: +2.95
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Overall, the position is long the equivalent of about three futures contracts. The
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position's profitability is mostly related to whether the futures rise or fall in price, not
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to how the spread between heating oil futures and unleaded gas futures behaves.
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The strategist could easily neutralize the long delta by selling three contracts.
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This would leave room for more profits if prices continue to rise ( there are still two
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extra long calls). It would also provide downside protection if prices suddenly drop,
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since the 5 long puts plus the 3 short futures would offset any loss in the 5 in-the
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money calls.
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Which futures should the strategist short? That depends on how confident he is
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in his original analysis of the intermarket spread widening. If he still thinks it will
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widen further, then he should sell unleaded gasoline futures against the deeply in
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the-money heating oil calls. This would give him an additional profit or loss opportu
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nity based on the relationship of the two oil products. However, ifhe decides that the
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intermarket spread should have widened more than this by now, perhaps he will just
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sell 3 heating oil futures as a direct hedge against the heating oil calls.
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Once one finds himself in a profitable situation, as in the above example, the
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rrwst conservative course is to hedge the in-the-rrwney option with its own underly
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ing future. This action lessens the further dependency of the profits on the inter
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market spread. There is still profit potential remaining from futures price action.
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Furthermore, if the futures should fall so far that both options return to in-the
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money status, then the intermarket spread comes back into play. Thus, in the above |