38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
712 Part V: Index Options and Futures
|
||
stitute for futures spreads - that is, using in-the-money options. If one buys in-the
|
||
rnoney calls instead of buying futures, and buys in-the-money puts instead of selling
|
||
futures, he can often create a position that has an advantage over the intramarket or
|
||
intermarket futures spread. In-the-money options avoid most of the problems
|
||
described in the two previous examples. There is no increase of risk, since the options
|
||
are being bought, not sold. In addition, the amount of money spent on time value
|
||
premium is small, since both options are in-the-money. In fact, one could buy them
|
||
so far in the money as to virtually eliminate any expense for time value premium.
|
||
However, that is not recommended, for it would negate the possible advantage of
|
||
using moderately in-the-money options: If the underlyingfutures behave in a volatile
|
||
manner, it might be possible for the option spread to make money, even if the futures
|
||
spread does not behave as expected.
|
||
In order to illustrate these points, the TED spread, an intermarket spread, will
|
||
be used. Recall that in order to buy the TED spread, one would buy T-bill futures
|
||
and sell an equal quantity of Eurodollar futures.
|
||
Options exist on both T-bill futures and Eurodollar futures. If T-bill calls were
|
||
bought instead of T-bill futures, and if Eurodollar puts were bought instead of sell
|
||
ing Eurodollar futures, a similar position could be created that might have some
|
||
advantages over buying the TED spread using futures. The advantage is that if T-bills
|
||
and/or Eurodollars change in price by a large enough amount, the option strategist
|
||
can make money, even if the TED spread itself does not cooperate.
|
||
One might not think that short-term rates could be volatile enough to make this
|
||
a worthwhile strategy. However, they can move substantially in a short period of time,
|
||
especially if the Federal Reserve is active in lowering or raising rates. For example,
|
||
suppose the Fed continues to lower rates and both T-bills and Eurodollars substan
|
||
tially rise in price. Eventually, the puts that were purchased on the Eurodollars will
|
||
become worthless, but the T-bill calls that are owned will continue to grow in value.
|
||
Thus, one could make money, even if the TED spread was unchanged or shrunk, as
|
||
long as short-term rates dropped far enough.
|
||
Similarly, if rates were to rise instead, the option spread could make money as
|
||
the puts gained in value (rising rates mean T-bills and Eurodollars will fall in price)
|
||
and the calls eventually became worthless.
|
||
Example: The following prices for June T-bill and Eurodollar futures and options
|
||
exist in January. All of these products trade in units of 0.01, which is worth $25. So a
|
||
whole point is worth $2,500.
|
||
June T-bill futures: 94.75
|
||
June Euro$ futures: 94.15 |