36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
676 Part V: Index Options and Futures
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In this case, the formula yields an incorrect result:
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Net change futures= +0.30 - (-0.02) = +0.32
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Since the futures are really up 50 cents, one can assume that one of the last sales
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is out of date. It is obviously the April 17 call, since that is the in-the-money option;
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if one were to ask for a quote from the trading floor, that option would probably be
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indicated up about 48 cents on the day.
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DELTA
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While we are on the subject of pricing, a word about delta may be in order as well.
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The delta of a futures option has the same meaning as the delta of a stock option: It
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is the amount by which the option is expected to increase in price for a one-point
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move in the underlying futures contract. As we also know, it is an instantaneous meas
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urement that is obtained by taking the first derivative of the option pricing model.
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In any case, the delta of an at-the-money stock or index option is greater than
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0.50; the more time remaining to expiration, the higher the delta is. In a simplified
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sense, this has to do with the cost of carrying the value of the striking price until the
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option expires. But part of it is also due to the distribution of stock price movements
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- there is an upward bias, and with a long time remaining until expiration, that bias
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makes call movements more pronounced than put movements.
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Options on futures do not have the carrying cost feature to deal with, but they
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do have the positive bias in their price distribution. A futures contract, just like a
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stock, can increase by more than 100%, but cannot fall more than 100%.
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Consequently, deltas of at-the-money futures calls will be slightly larger than 0.50.
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The more time remaining until expiration of the futures option, the higher the at-the
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money call delta will be.
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Many traders erroneously believe that the delta of an at-the-money futures
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option is 0.50, since there is no carrying cost involved in the futures conversion or
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reversal arbitrage. That is not a true statement, since the distribution of futures prices
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affects the delta as well.
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As always, for futures options as well as for stock and index options, the delta of
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a put is related to the delta of a call with the same striking price and expiration date:
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Delta of put = 1 - Delta of call
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Finally, the concept of equivalent stock position applies to futures opti<i>n strate
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gies, except, of course, it is called the equivalent futures position (EFP). The EFP is
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calculated by the simple formula:
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EFP = Delta of option x Option quantity |