36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
Chapter 28: Mathematical Applications 485
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tively. Some later time, the stock falls to 27 and the trader needs to reevaluate his
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position. The hedge ratios may have become .42 for the January 30 and .14 for the
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January 35, indicating that a 3:1 ratio would be neutral (.42/.14 = 3). He now has a
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bullish position, because his 2:1 ratio is less than the neutral 3:1 ratio. It is not manda
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tory that the trader act on this information. He may actually be bullish on the stock
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at this point and decide to remain with his position. The usefulness of the hedge ratio
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is that it allows him to see that his position is bullish, so he can make a correct judg
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ment. Without this knowledge, he might still think his position to be neutral, a criti
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cal mistake if he indeed wants to be neutral. If the trader's ratio is greater than the
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neutral ratio (2:1 vs. 3:2, for example), he is bearishly positioned.
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As a final point, it should be noted that the ratio can be adjusted by buying or
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selling either option.
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Example: If the stock falls and it is desired that the ratio be increased to 3:1, one
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might sell more January 35's or might decide to sell out some of his January 30's. A
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bullish adjustment could be made by buying on either side of the spread in a similar
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manner. In general, one should adjust by selling time premium or buying intrinsic
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value. That is, out-of-the-moneys are usually sold and in-the-moneys are usually
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bought, when adjusting.
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AIDING IN FOLLOW-UP ACTION
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The computer can also be an invaluable aid to the strategist in that it can help him
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monitor his positions. It is generally necessary for the strategist to have some way of
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inputting his positions into an inventory database and also to have some way of iden
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tifying different securities that are grouped within the same trading position. Once
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this has been done, the computer can simultaneously read pricing data ( either real
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time or closing prices) and the inventory database to generate information concern
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ing the current status of any position.
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A current mark to market (profit and loss) statement is of obvious use in that
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the trader can see how he is doing each day. The computer can also easily generate
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a set of warning flags that may be of interest to the trader, and could produce a list
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summarizing possible positions that need action. In most of the strategies that were
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described, it was shown that the strategist should avoid early assignment if at all pos
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sible. It is a simple matter for the computer to calculate the remaining time value
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premium of any short options, and to warn the trader if there is only a small amount
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of time value premium remaining, perhaps ½ point or less. For similar reasons, the
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trader may want to have a daily list of positions that are nearing maturity, perhaps |