40 lines
3.1 KiB
Plaintext
40 lines
3.1 KiB
Plaintext
486 Part IV: Additional Considerations
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with less than I month oflife remaining in the options. A flag indicating an approach
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ing ex-dividend date might also be useful for this purpose.
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If the trader inputs another piece of information into the database, the com
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puter can help him in another follow-up action. In most strategies that were
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described, especially those involving uncovered options, the trader wants to take
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some sort of follow-up action based on the price movement of the underlying stock.
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If the stock rallies too far, he may want to cover short calls or buy other calls as pro
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tection. If the stock declines too far, similar maneuvers would apply to put options or
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to rolling down short calls. If the trader inputs the stock prices at which he would like
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to take action, the computer can monitor each day's closing price of the stock and
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generate a list of positions that have exceeded their upside or downside action points.
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The computer can also do more sophisticated types of position monitoring.
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Recall that it was pointed out that the deltas of the options involved in a position can
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be compared to each other to tell whether the position is bullish or bearish. The
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Black-Scholes model can be used to calculate the deltas of the options in one's posi
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tions. Then the net position can be determined by the computer, thereby telling the
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trader whether his position has become "delta long" (bullish), "delta short" (bearish),
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or neutral. If he sees that a position is bearish and he does not want to be structured
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in that way, he can make bullish adjustments. The delta spread and neutral spread
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strategies very conveniently lend themselves to such types of follow-up action,
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although any of the more complicated straddle writing and protected straddle writ
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ing positions can be monitored usefully in this way as well.
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The computation for determining whether a position is net short or net long
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generally involves calculating the "equivalent stock position" (ESP). If one owns 10
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calls that have a delta of .45, his equivalent stock position from those calls is IO X 100
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shares per call x .45 = 450. That is, owning those IO calls is equivalent to owning 450
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shares of the underlying stock, according to the delta. All puts and calls can be
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reduced to an ESP and can then, of course, be combined with any actual long or
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short stock in the position to produce an ESP for the entire strategy. The resultant
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ESP for each of the trader's positions can be printed from the computer along with
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the items described above.
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Further sophisticated measures can be taken. The computer can generate a
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table of results at expiration. If so desired, this could be presented as a graph, but that
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is not really necessary. A table suffices quite well, as shown by most of the examples
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in this book. Such a picture has meaning only if all options in the position expire at
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the same time. If they don't, one may instead want the computer to mmpose a table
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of results or a graph at near-term expiration. Thus, in a calendar spread, for example,
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one could see what sorts of profitability he would be looking at when it was time to
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remove the spread. |