40 lines
1.7 KiB
Plaintext
40 lines
1.7 KiB
Plaintext
842
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Initial situation: OEX: 580
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Option
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June 590 call
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June 600 call
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A neutral spread would be:
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Buy 2 June 600 calls
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Sell I June 590 call
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Implied Volatility
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15%
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14%
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since the deltas are in the ratio of 2-to-l.
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Part VI: Measuring and Trading Volatility
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Delta
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0.40
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0.20
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Now, suppose that OEX rises to 600 at a later date, but well before expiration.
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This is not a particularly attractive price for this position. Recall that, at expiration, a
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backspread has its worst result at the striking price of the purchased options. Even
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prior to expiration, one would not expect to have a profit with the index right at 600.
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However, the statistical advantage that the strategist had to begin with might be
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able to help him out. The present situation would probably look like this:
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Option
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June 590 call
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June 600 call
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Implied Volatility
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17%
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16%
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The June 600 call is now the at-the-money call, since OEX has risen to 600. As
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such, its implied volatility will be 16% ( or whatever the "average" volatility is for OEX
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at that time - the assumption is made that it is still 16% ). The June 590 call has a
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slightly higher volatility (17%) because volatility skewing is still present.
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Thus, the options that are long in this spread have had their implied volatility
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increase; that is a benefit. Of course, the options that are short had theirs increase as
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well, but the overall spread should benefit for two reasons:
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1. Twice as many options are owned as were sold.
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2. The effect of increased volatility is greatest on the at-the-money option; the in
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the-money will be affected to a lesser degree.
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All index options exhibit this volatility skewing. Volatility skewing exists in other
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markets as well. The other markets where volatility skewing is prevalent are usually |