34 lines
1.5 KiB
Plaintext
34 lines
1.5 KiB
Plaintext
870
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FIGURE 40-8.
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XYZ ratio spread.
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f/)
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f/)
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3000
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2000
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.3 1000
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~
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e a..
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(r.>
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40
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Part VI: Measuring and Trading Volatility
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45 55 60
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At Expiration
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Stock Price
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Thus, a delta neutral straddle position would consist of buying 8 J anua:ry 50 calls
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and buying 11 Februa:ry 50 puts. The straddle has no market exposure, at least over
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the short term. Note that the delta neutral straddle has a significantly different prof
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it picture from the delta neutral ratio spread, but they are both neutral and are both
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based on the fact that the Janua:ry 50 call is cheap. The straddle makes money if the
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stock moves a lot, while the other makes money if the stock moves only a little. (See
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Figure 40-9.)
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Can these two vastly different profit pictures be depicting strategies in which
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the same thing is to be accomplished ( that is, to capture the underpriced nature of
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the XYZ Janua:ry 50 call)? Yes, but in order to decide which strategy is "best," the
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strategist would have to take other factors into consideration: the historical volatility
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of the underlying security, for example, or how much actual time remains until
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Janua:ry expiration, as well as his own psychological attitude toward selling uncovered
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calls. A more precise definition of the other risks of these two positions can be
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obtained by looking at their position gammas.
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Delta Neutral Is Not Entirely Neutral. In fact, delta neutral means that
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one is neutral only with respect to small price changes in the underlying securi
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ty. A delta neutral position may have seriously unneutral characteristics when |