36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
Chapter 24: Ratio Spreads Using Puts 363
|
||
before near-term expiration, since the eventual large profits will be able to overcome
|
||
a series of small losses, but could not overcome a preponderance oflarge losses.
|
||
RATIO PUt CALENDARS
|
||
Using the deltas of the puts in the spread, the strategist can construct a neutral posi
|
||
tion. If the puts are initially out-of-the-money, then the neutral spread generally
|
||
involves selling more puts than one buys. Another type of ratioed put calendar can
|
||
be constructed with in-the-money puts. As with the companion in-the-money spread
|
||
with calls, one would buy more puts than he sells in order to create a neutral ratio.
|
||
In either case, the delta of the put to be purchased is divided by the delta of the
|
||
put to be sold. The result is the neutral ratio, which is used to determine how many
|
||
puts to sell for each one purchased.
|
||
Example: Consider the out-of-the-money case. XYZ is trading at 59. The January 50
|
||
put has a delta of 0.10 and the April 50 put has a delta of -0.17. If a calendar spread
|
||
is to be established, one would be buying the April 50 and selling the January 50.
|
||
Thus, the neutral ratio would be calculated as 1.7 to 1 (-0.17/-0.10). Seventeen puts
|
||
would be sold for every 10 purchased.
|
||
This spread has naked puts and therefore has large risk if the underlying stock
|
||
declines too far. However, follow-up action could be taken if the stock dropped in an
|
||
orderly manner. Such action would be designed to limit the downside risk.
|
||
Conversely, the calendar spread using in-the-money puts would normally have
|
||
one buying more options than he is selling. An example using deltas will demonstrate
|
||
this fact:
|
||
Example: XYZ is at 59. The January 60 put has a delta of -0.45 and the April 60 put
|
||
has a delta of -0.40. It is normal for shorter-term, in-the-money options to have a
|
||
delta that is larger (in absolute terms) than longer-term, in-the-money options.
|
||
The neutral ratio for this spread would be 0.889 (-0.40/-0.45). That is, one
|
||
would sell only 0.889 puts for each one he bought. Alternatively stated, he would sell
|
||
8 and buy 9.
|
||
A spread of this type has no naked puts and therefore does have large downside
|
||
profit potential. If the stock should rise too far, the loss is limited to the initial debit
|
||
of the spread. The optimum result would occur if the stock were at the strike at expi
|
||
ration because, even though the excess long put would lose money in that case, the
|
||
spreads involving the other puts would overcome that small loss.
|
||
Another risk of the in-the-money put spread is that one might be assigned
|
||
rather quickly if the stock should drop. In fact, one must be careful not to establish |