28 lines
1.5 KiB
Plaintext
28 lines
1.5 KiB
Plaintext
be exercised? Will the puts get assigned? If the puts are assigned, the
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traders are left with no short stock and should let the calls expire without
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exercising so as not to have a long delta position after expiration. If the puts
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are not assigned, they should exercise the calls to get delta flat. It’s also
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possible that only some of the puts will be assigned.
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Because they don’t know how many, if any, of the puts will be assigned,
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the market makers have pin risk. To avoid pin risk, market makers try to
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eliminate their position if they have conversions or reversals close to
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expiration.
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Boxes and Jelly Rolls
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There are two other uses of synthetic stock positions that form conventional
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strategies: boxes and rolls.
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Boxes
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When long synthetic stock is combined with short synthetic stock on the
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same underlying within the same expiration cycle but with a different strike
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price, the resulting position is known as a box. With a box, a trader is
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synthetically both long and short the stock. The two positions, for all intents
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and purposes, offset each other directionally. The risk of stock-price
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movement is almost entirely avoided. A study of the greeks shows that the
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delta is close to zero. Gamma, theta, vega, and rho are also negligible.
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Here’s an example of a 60–70 box for April options:
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Short 1 April 60 call
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Long 1 April 60 put
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Long 1 April 70 call
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Short 1 April 70 put
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In this example, the trader is synthetically short the 60-strike and, at the
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same time, synthetically long the 70-strike. Exhibit 6.9 shows the greeks.
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EXHIBIT 6.9 Box greeks. |