37 lines
2.4 KiB
Plaintext
37 lines
2.4 KiB
Plaintext
616 Part V: Index Options and Futu,
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A better alternative might be to roll his imbedded call up, thereby taking s01
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money out of the position but still retaining upside profit potential. Recall that t
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structured product had these terms:
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Guarantee price: 10
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Underlying index: S&P 500 index ($SPX)
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Striking price: 700
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As in the earlier example, the investor owns 15,000 shares of the structun
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product. Furthermore, assume that there are about two years remaining until mat
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rity of the structured product, and that the current prices are the same as in the pr
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vious example:
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Current price of structured product: 16.50
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Current price of $SPX: 1,200
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For purposes of simplicity, let's assume that there are listed two-year LEAP
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options available for the S&P index, whose prices are:
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S&P 2-year LEAPS, striking price 700: 550
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S&P 2-year LEAPS, striking price 1,200: 210
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In reality, S&P LEAPS options are normally reduced-value options, meanin.
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that they are for one-tenth the value of the index and thus sell for one-tenth the pricE
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However, for the purposes of this theoretical example, we will assume that the full
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value LEAPS shown here exist.
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It was shown in the previous example that the investor would trade two of thest
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calls as an equivalent amount to the quantity of calls imbedded in his structurec
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product. So, this investor could buy two of the 1,200 calls and sell two of the 700 calli
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and thereby roll his striking price up from 700 to 1,200. This roll would bring in 34(
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points, two times; or $68,000 less commissions.
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Since the difference in the striking prices is 500 points, you can see that he is
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leaving something "on the table" by receiving only 340 points for the roll-up. This is
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common when rolling up: One loses the time value premium of the vertical spread.
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However, when viewed from the perspective of what has been accomplished, the
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investor might still find this roll worthwhile. He has now raised the striking price of
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his call to 1,200, based on the S&P index, and has taken in $68,000 in doing so. Since
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he owns 15,000 shares of the structured product, that means he has taken in 4.53 p~r
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share (68,000 / 15,000). Now, for example, if the S&P crashes during the next two
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years and plummets below 700 at the maturity date, he will receive $10 as the guar
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antee price plus the $4.53 he got from the roll - a total "guarantee" of $14.53. Thus,
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he has protected his downside. |