35 lines
2.1 KiB
Plaintext
35 lines
2.1 KiB
Plaintext
Chapter 35: Futures Option Strategies for Futures Spreads 711
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or out-of-the-money puts instead of selling futures, he could be exposing his spread
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profits to the ravages of time decay. Do not substitute at- or out-of-the-rrwney options
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for the futures in intramarket or intennarket spreads. The next example will show
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why not.
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Example: A futures spreader notices that a favorable situation exists in wheat. He
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wants to buy July and sell May. The following prices exist for the futures and options:
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May futures: 410
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July futures: 390
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May 410 put: 20
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July 390 call: 25
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This trader decides to buy the May 410 put instead of selling May futures; he
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also buys the July 390 call instead of buying July futures.
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Later, the following prices exist:
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May futures: 400
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July futures: 400
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May 410 put: 25
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July 390 call: 30
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The futures spread would have made 20 points, since they are now the same
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price. At least this time, he has made money in the option spread. He has made 5
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points on each option for a total of 10 points overall - only half the money that could
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have been made with the futures themselves. Nate that these sample option prices
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still show a good deal of time value premium remaining. If more time had passed and
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these options were trading closer to parity, the result of the option spread would be
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worse.
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It might be pointed out that the option strategy in the above example would
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work better if futures prices were volatile and rallied or declined substantially. This
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is true to a certain extent. If the market had moved a lot, one option would be very
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deeply in-the-money and the other deeply out-of-the-money. Neither one would
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have much time value premium, and the trader would therefore have wasted all the
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money spent for the initial time premium. So, unless the futures moved so far as to
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outdistance that loss of time value premium, the futures strategy would still outrank
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the option strategy.
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However, this last point of volatile futures movement helping an option position
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is a valid one. It leads to the reason for the only favorable option strategy that is a sub- |