37 lines
2.6 KiB
Plaintext
37 lines
2.6 KiB
Plaintext
580 Part V: Index Options and Futures
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on two indices can trade at significantly different price levels from the spread
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between the two indices themselves. When this happens, an inter-index spread
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becomes feasible.
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The margin requirements for these spreads are often reduced because margin
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rules recognize that futures on one index can be hedged by futures on another index.
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The general rule of thumb as far as selecting a futures spread to establish
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between two indices is to compare the price difference in the respective futures to
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the actual price difference in the indices themselves. If the difference in the futures
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is substantially different from the difference in the cash prices of the indices, then
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one would sell the more expensive future and buy the cheaper one. Several specific
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spreads are discussed in this chapter.
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Regardless of whether one is entering into the spread because he is trying to
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predict the relationships between the cash indices, or because he knows the two
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respective futures are out of line, he must decide in what ratio he wants to establish
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the spread. There are two lines of thinking on this subject. The first is to merely buy
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one future and sell one future (on two different indices, of course). Many chart books
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and spread history charts are graphed in this manner - they compare one index to
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another index on a one-for-one basis.
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Example: A spreader wants to buy the ZYX Index futures and sell ABX futures
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against them. They are both trading in units of $500 per point, but ZYX is currently
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at 175.00 while ABX is at 130.00. Thus, the current differential is 45.00 points. This
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spreader would want the spread to widen to something larger in order to make
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money. The following profit table shows how he could make a $2,500 profit if the
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spread widens to 50.00 points, no matter which way the market goes.
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Market ZYX ZYX ABX ABX Total
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Direction Price Profit Price Profit Profit
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up 185.00 +$5,000 135.00 -$2,500 +$2,500
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neutral 177.00 + 1,000 127.00 + 1,500 + 2,500
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down 160.00 - 7,500 110.00 + 10,000 + 2,500
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Notice that in each case, the difference in the prices of the indices ZYX and ABX is
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50.00 points. The profit is the same regardless of whether the general stock market
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rose, was relatively unchanged, or fell.
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The $2,500 profit is the five points of profit that the spreader makes by buying
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the spread of 45.00 and selling it at 50.00 (5.00 points x $500 per point = $2,500).
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The second approach to index spreading is to use a ratio of the two indices. This
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approach is often taken when the two indices trade at substantially different prices. |