36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
542 Part V: Index Options and Futures
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bly the 180 strike, since those strikes are the ones whereby the calls have the least
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chance for early assignment.
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Where short options are involved, as with the calls in the above example, one
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must be aware of the possibility of early assignment exposing the portfolio.
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Consequently, if the marketplace has an equal premium on the futures and the "syn
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thetic" UVX, one should sell the futures in that case, because there is no possibility
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of unwanted assignment. However, if the options represent a synthetic price that is
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more expensive than the futures, then using the options may be more attractive.
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Example: Suppose that our same investor has decided to hedge his portfolio with its
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$720,000 of adjusted capitalization. He is indifferent as to whether to use the ZYX
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futures or the UV:X options. He will use whichever one affords him the better oppor
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tunity. The following table depicts the prices of the securities that he is considering,
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as well as their fair values.
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Current Fair Index
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Security Price Value Price
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ZYX Jun Future 180.50 180.65 178.65
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UVX Jun 175 Call 5 5 175.60
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UVX Jun 175 Put 2 21/2 175.60
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UVX Jun 180 Call 21/2 21/2 175.60
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UVX Jun 1 80 Put 41/2 5 175.60
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This investor essentially has three choices: (1) to use the ZYX futures, (2) to use
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the UVX options with the 175 strike, or (3) to use the UV:X options with the 180
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strike. Notice that the ZYX future is trading 15 cents below its fair value (180.50 vs.
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180.65). The UV:X Index fair value, as shown by the fair values of the options, is
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177.50. This can be computed by adding the call price to the strike and subtracting
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the put price. In the case of either strike, the fair values indicate a UV:X Index fair
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value of 177.50.
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However, the actual markets are slightly out of line. When using the actual
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prices, one sees that he can sell the UV:X Index synthetically for 178.00 whether he
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uses the l 75's or the 180's. Thus, by using the UV:X options he can sell the UVX
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"future" synthetically for ½ point over fair value, while the ZYX futures would have
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to be sold at 15 cents under fair value. Thus, the options appear to be a better choice
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since 65 cents ( the 50 cents that the UV:X options are overvalued plus the 15 cents
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that the futures are undervalued) is probably enough of an edge to offset the possi
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bility of early assignment. |