32 lines
1.8 KiB
Plaintext
32 lines
1.8 KiB
Plaintext
A trader with this position is synthetically long the stock at $60 and short
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the stock at $70. That sounds like $10 in the bank. The question is: How
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much would a trader be willing to pay for the right to $10? And for how
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much would someone be willing to sell it? At face value, the obvious
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answer is that the equilibrium point is at $10, but there is one variable that
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must be factored in: time.
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In this example, assume that the October call has 90 days until expiration
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and the interest rate is 6 percent. A rational trader would not pay $10 today
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for the right to have $10 90 days from now. That would effectively be like
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loaning the $10 for 90 days and not receiving interest—A losing
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proposition! The trader on the other side of this box would be happy to
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enter into the spread for $10. He would have interest-free use of $10 for 90
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days. That’s free money! Certainly, there is interest associated with the cost
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of carrying the $10. In this case, the interest would be $0.15.
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This $0.15 is discounted from the price of the $10 box. In fact, the
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combined net value of the options composing the box should be about 9.85
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—with differences due mainly to rounding and the early exercise possibility
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for American options.
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A trader buying this box—that is, buying the more ITM call and more
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ITM put—would expect to pay $0.15 below the difference between the
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strike prices. Fair value for this trade is $9.85. The seller of this box—the
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trader selling the meatier options and buying the cheaper ones—would
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concede up to $0.15 on the credit.
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Jelly Rolls
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A jelly roll, or simply a roll, is also a spread with four legs and a
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combination of two synthetic stock trades. In a box, the difference between
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the synthetics is the strike price; in a roll, it’s the contract month. Here’s an
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example:
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Long 1 April 50 call
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Short 1 April 50 put
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Short 1 May 50 call
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Long 1 May 50 put |