27 lines
1.5 KiB
Plaintext
27 lines
1.5 KiB
Plaintext
882 Part VI: Measuring and Trading Volatmty
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Merely divide the two gammas to determine the neutral ratio to be used. In this case,
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assume that the April 50 call and the April 60 call are to be used:
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Gamma neutral ratio: 0.045/0.026 = 1.73-to-l
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Thus, a gamma neutral position would be created by buying 100 April 50's and sell
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ing 173 April 60's. Alternatively, buying 10 and selling 17 would be close to gamma
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neutral as well. The larger position will be used for the remainder of this example.
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Now that this ratio has been chosen, what is the effect on delta and vega?
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Option Position Option Position Option Position
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Position Delta Delta Gamma Gamma Vega Vega
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Long 1 00 April 50 0.47 +4,700 0.045 +450 0.08 + $800
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Short 173 April 60 0.17 -2,941 0.026 -450 0.06 -1,038
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Total: + 1,759 0 - $238
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The position delta is long 1,759 shares of XYZ. This can easily be "cured" by
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shorting 1,700 or 1,800 shares ofXYZ to neutralize the delta. Consequently, the com
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plete position, including the short 1,700 shares, would be neutral with respect to both
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delta and gamma, and would have the desired negative vega.
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The actual profit picture at expiration is shown in Figure 40-11. Bear in mind,
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however, that the strategist would normally not intend to hold a position like this until
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expiration. He would close it out if his expectations on volatility decline were fulfilled
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( or proved false).
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FIGURE 40-11.
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Spread with negative vega; gamma and delta neutral.
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40000...., ....
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10000
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50 55 60
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XVZ :Stock Price |