27 lines
1.8 KiB
Plaintext
27 lines
1.8 KiB
Plaintext
earnings event is pending, this stock’s options typically trade at about a 25
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percent IV. Therefore, anticipating a 10-point decline from 35 was
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reasonable, given the information available. If Susie gets it right, she stands
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to make $1,150 from vega (10 points × 1.15 vegas × 100).
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As we can see from the right side of the volatility chart in Exhibit 12.3 ,
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Susie did get it right. IV collapsed the next morning by just more than ten
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points. But she didn’t make $1,150; she made less. Why? Realized volatility
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(gamma). The jump in realized volatility shown on the graph is a function
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of the fact that the stock rallied $2 the day after earnings. Negative gamma
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contributed to negative deltas in the face of a rallying market. This negative
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delta affected some of Susie’s potential vega profits.
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So what was Susie’s profit? On this trade she made $800. The next
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morning at the open, she bought back the 50-strike calls at 2.80 (25 IV) and
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sold the stock at $52. To compute her actual profit, she compared the prices
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of the spread when entering the trade with the prices of the spread when
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exiting. Exhibit 12.5 shows the breakdown of the trade.
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EXHIBIT 12.5 Profit breakdown of delta-neutral trade.
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After closing the trade, Susie knew for sure what she made or lost. But
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there are many times when a trader will hold a delta-neutral position for an
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extended period of time. If Susie hadn’t closed her trade, she would have
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looked at her marks to see her P&(L) at that point in time. Marks are the
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prices at which the securities are trading in the actual market, either in real
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time or at end of day. With most online brokers’ trading platforms or
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options-trading software, real-time prices are updated dynamically and
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always at their fingertips. The profit or loss is, then, calculated
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automatically by comparing the actual prices of the opening transaction
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with the current marks. |