18 lines
1.1 KiB
Plaintext
18 lines
1.1 KiB
Plaintext
Buy one 71-day 50 call at 3.50
|
|
Sell one 71-day 50 put at 1.50
|
|
Sell 100 shares at 51.54
|
|
The trader establishes a short position in the stock at $51.54 and a long
|
|
synthetic stock position effectively at $52.00. He buys the stock
|
|
synthetically at $0.46 over the stock price, again assuming the trade can be
|
|
executed at fair value. With the reversal, the trader has a bullish position on
|
|
interest rates, which is indicated by a positive rho.
|
|
In this example, the rho for this position is 0.090. If interest rates rise one
|
|
percentage point, the synthetic stock (which the trader is long) gains nine
|
|
cents in value relative to the stock. The short stock rebate on the short stock
|
|
leg earns more interest at a higher interest rate. If rates fall one percentage
|
|
point, the synthetic long stock loses $0.09. The trader earns less interest
|
|
being short stock given a lower interest rate.
|
|
With the reversal, the fact that the put can be exercised early is a risk.
|
|
Since the trader is short the put and short stock, he hopes not to get
|
|
assigned. If he does, he misses out on the interest he planned on collecting
|
|
when he put on the reversal for $0.46 over. |