41 lines
2.5 KiB
Plaintext
41 lines
2.5 KiB
Plaintext
756 Part VI: Measuring and Trading Volatility
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Notice that the stock price is equal to the strike price (100). However, the deltas
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are not at all equal. In fact, the delta of the call is 1.5 times that of the put (in absolute
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value). One must buy three puts and two calls in order to have a delta-neutral posi
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tion.
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Most experienced option traders know that the delta of an at-the-money call is
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somewhat higher than that of an at-the-money put. Consequently, they often esti
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mate, without checking, that buying three puts and two calls produces a delta-neu
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tral "straddle buy." However, consider a similar situation, but with a much higher
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implied volatility- 110%, say.
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AAA Common: 100; Implied Volatility: 110%
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Option
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AAA October 100 call
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AAA October 1 00 put
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Price
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31.00
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28.00
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Delta
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0.67
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-0.33
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The delta-neutral ratio here is two-to-one (67 divided by 33), not three-to-two
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as in the earlier case - even though both stock prices are 100 and both sets of options
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have six months remaining. This is a big difference in the delta-neutral ratio, espe
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cially if one is trading a large quantity of options. This shows how different levels of
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implied volatility can alter one's perception of what is a neutral position. It also points
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out that one can't necessarily rely on his intuition; it is always best to check with a
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model.
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Carrying this thought a step further, one must be mindful of a change in implied
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volatility if he wants to keep his position delta-neutral. If the implied volatility of AAA
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options should drop significantly, the 2-to-l ratio will no longer be neutral, even if the
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stock is still trading at 100. Hence, a trader wishing to remain delta-neutral must
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monitor not only changes in stock price, but changes in implied volatility as well. For
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more complex strategies, one will also find the delta-neutral ratio changing due to a
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change in implied volatility.
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The preceding examples summarize the major variables that might affect the
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vega and also show how vega affects things other than itself, such as delta and, there
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fore, delta neutrality. By the way, the vega of the underlying is zero; an increase in
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implied volatility does not affect the price of the underlying instrument at all, in the
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ory. In reality, if options get very expensive (i.e., implied volatility spikes up), that
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usually brings traders into a stock and so the stock price will change. But that's not a
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mathematical relationship, just a market cause-and-effect relationship. |