35 lines
2.1 KiB
Plaintext
35 lines
2.1 KiB
Plaintext
options to me at prices I wanted to buy them—my bid—and buying options
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from me at prices I wanted to sell them—my offer. Upon making an option
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trade, I needed to hedge directional risk immediately. I usually did so by
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offsetting my option trades by taking the opposite delta position in the stock
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—especially on big-delta trades. Through this process of providing liquidity
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to the market, I built up option-centric risk.
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To manage this risk I needed to watch my other greeks. To be sure, trying
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to draw a P&L diagram of this position would be a fruitless endeavor.
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Exhibit 16.8 shows the risk of this trade in its most distilled form.
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EXHIBIT 16.8 Analytics for market-maker position in Ford Motor Co.
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(stock at $15.72).
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Delta +1,075
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Gamma−10,191
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Theta +1,708
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Vega +7,171
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Rho −33,137
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The +1,075 delta shows comparatively small directional risk relative to
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the −10,191 gamma. Much of the daily task of position management would
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be to carefully guard against movement by delta hedging when necessary to
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earn the $1,708 per day theta.
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Much of the negative gamma/positive theta comes from the combined
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1,006 short January 15 calls and puts. (Note that because this position is
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traded delta neutral, the net long or short options at each strike is what
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matters, not whether the options are calls or puts. Remember that in delta-
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neutral trading, a put is a call, and a call is a put.) The positive vega stems
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from the fact that the position is long 1,927 January 2003 20-strike options.
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Although this position has a lot going on, it can be broken down many
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ways. Having long LEAPS options and short front-month options gives this
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position the feel of a time spread. One way to think of where most of the
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gamma risk is coming from is to bear in mind that the 15 strike is
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synthetically short 503 straddles (1,006 options ÷ two). But this position
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overall is not like a straddle. There are more strikes involved—a lot more.
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There is more short gamma to the downside if the price of Ford falls toward
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$12.50. To the upside, the 17.50 strike is long a combined total of 439
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options. Looking at just the 15 and 17.50 strikes, we can see something that |