38 lines
2.0 KiB
Plaintext
38 lines
2.0 KiB
Plaintext
535
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OPTION TrAdINg STrATegIeS
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This strategy can perhaps be best understood by comparing it to the long call position (e.g., long
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August $1,250 gold futures call). In eff ect, the spread trader reduces the premium cost for the long
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call position by the amount of premium received for the sale of the more deeply out-of-the-money
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call. This reduction in the net premium cost of the trade comes at the expense of sacrifi cing the pos-
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sibility of unlimited gain in the event of a large price rise. As can be seen in Figure 35.18 , in contrast
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to the outright long call position, price gains beyond the higher strike price will cease to aff ect the
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profi tability of the trade.
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Strategy 19a: bear Call Money Spread (Short Call with Lower Strike
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price/Long Call with higher Strike price)—Case 1
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example . Buy August $1,150 gold futures call at a premium of $70.10/oz ($7,010) and simultane-
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ously sell an August $1,100 gold futures call at a premium of $110.10/oz ($11,010), with August
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gold futures trading at $1,200/oz. (See Table 35.19 a and Figure 35.19 a.)
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Comment. This type of spread is called a credit spread, since the amount of premium received for
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the short call position exceeds the premium paid for the long call position. The maximum possible
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gain on the trade is equal to the net diff erence between the two premiums. The maximum possible
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loss is equal to the diff erence between the two strike prices minus the diff erence between the two
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premiums. The maximum gain would be realized if prices declined to the lower strike price. The
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maximum loss would occur if prices failed to decline to at least the higher strike price. Although
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FIGURE 35.18 Profi t/loss Profi le: Bull Call Money Spread (long Call with lower Strike Price/
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Short Call with Higher Strike Price)
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Price of August gold futures at option expiration ($/oz)
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Profit/loss at expiration ($)
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1,000
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3,750
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5,000
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2,500
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0
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−1,250
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1,250
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1,050 1,100 1,150 1,200 1,250
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Breakeven price
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= $1,260.10
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1,300 1,350 1,400
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−2,500
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Futures price at time
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of position initiation |