20 lines
1.2 KiB
Plaintext
20 lines
1.2 KiB
Plaintext
EXHIBIT 12.8 Delta-neutral long call, short stock position.
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With the stock at $49.70, the calls had +0.51 delta per contract, or +10.2
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for the 20-lot. The short sale of 1,000 shares got Bobby as close to delta-
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neutral as possible without trading an odd lot in the stock. The net position
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delta was +0.20, or about the equivalent of being long 20 shares of stock.
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Bobby’s objective in this case is to profit from an increase in implied
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volatility leading up to earnings.
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While Susie was looking for reversion to the mean, Bobby hoped for a
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further divergence. For Bobby, positive gamma looked like a good thing on
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the surface. However, his plan was to close the position just before earnings
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were released—before the vol crush and before the potential stock-price
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move. With realized volatility already starting to drop off at the time the
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trade was put on, gamma offered little promise of gain.
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As fate would have it, IV did indeed increase. At the end of the day before
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the July earnings report, IV was trading at 35 percent. Bobby closed his
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trade by selling his 20-lot of the 50 calls at 2.10 and buying his 1,000 shares
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of stock back at $50. Exhibit 12.9 shows the P&(L) for each leg of the
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spread.
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EXHIBIT 12.9 Profit breakdown.
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