36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
574 Part V: Index Options and Futures
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tion. He would both sell calls and buy puts with the same striking price in order to
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create the hedge. This is similar to a conversion arbitrage.
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When attempting to hedge the S&P 500, one could use the S&P 500 futures
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options or the S&P 500 cash options, but that would not necessarily present a more
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attractive situation than using the futures. On the other hand, there is not a liquid
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S&P 100 (OEX) futures contract, so that when hedging that contract, one generally
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uses the OEX options. As mentioned earlier, inter-index option spreads between var
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ious indices, including the S&P 100 and 500, will be discussed in the next chapter.
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There is not normally much difference as to which of the two is better at any
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one time. However, since a full option hedge requires two executions (both selling
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the call and buying the put), the futures probably have a slight advantage in that they
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involve only a single execution.
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In order to substitute options for futures in any of the examples in these chap
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ters on indices, one merely has to use the appropriate number of options as com
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pared to the futures. If one were going to sell OEX calls instead of S&P 500 futures,
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he would multiply the futures quantity by 5. Five is the multiple because S&P 500
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futures are worth $250 per point while OEX options are worth $100 per point, and
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because the S&P 500 Index (SPX) trades at twice the price of OEX (OEX split 2-for
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l in November 1997). Thus, if an example calls for the sale of 20 S&P 500 futures,
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then an equivalent hedge with OEX options would require 100 short calls and 100
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long puts.
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One could attempt to create less fully hedged positions by using the options
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instead of the futures. For example, he might buy stocks and just write in-the-money
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calls instead of selling futures. This would create a covered call write. He would still
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use the same techniques to decide how much of each stock to buy, but he would have
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downside risk if he decided not to buy the puts. Such a position would be most attrac
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tive when the calls are very overpriced.
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Similarly, one might ti:y to buy the stocks and buy slightly in-the-money puts
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without selling the calls. This position is a synthetic long call; it would have upside
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profit potential and would lose if the index fell, but would have limited risk. Such a
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position might be established when puts are cheap and calls are expensive.
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TRADING THE TRACKING ERROR
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Another reason that one might sell futures against a portfolio of stocks is to actually
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attempt to capture the tracking error. If one were bullish on oil drilling stocks, for
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example, and expected them to outperform the general market, he might buy sever- |