47 lines
2.0 KiB
Plaintext
47 lines
2.0 KiB
Plaintext
Chapter 34: Futures and Futures Options 693
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The reader has seen these follow-up strategies earlier in the book. However,
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there is one new concept that is important: The mispricing continues to propagate
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itself no matter what the price of the underlying futures contract. The at-the-money
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options will always be about fairly priced; they will have the average implied volatility.
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Example: In the previous examples, January soybeans were trading at 583 and the
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implied volatility of the options with striking price 575 was 15%, while those with a
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600 strike were 17%. One could, therefore, conclude that the at-the-money January
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soybean options would exhibit an implied volatility of about 16%.
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This would still be true if beans were at 525 or 675. The mispricing of the other
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options would extend out from what is now the at-the-money strike. Table 34-3 shows
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what one might expect to see if January soybeans rose 75 cents in price, from 583 to
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658.
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Nate that the same mispricing properties exist in both the old and new situa
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tions: The puts that are 58 points out-of-the-money have an implied volatility of only
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12%, while the calls that are 92 points out-of-the-money have an implied volatility of
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23%.
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TABLE 34-3.
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Propagation of volatility skewing.
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Original Situation
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January beans: 583
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Implied
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Strike Volatility
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525 12%
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550 13%
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575 15%
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600 17%
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625 19%
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650 21%
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675 23%
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New Situation
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January beans: 658
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Strike
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600
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625
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650
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675
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700
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725
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750
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This example is not meant to infer that the volatility of an at-the-money soybean
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futures option will always be 16%. It could be anything, depending on the historical
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and implied volatility of the futures contract itself. However, the volatility skewing
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will still persist even if the futures rally or decline.
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This fact will affect how these strategies behave as the(linderlying futures con
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tract moves. It is a benefit to both strategies. First, look at the put backspread when
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the stock falls to the striking price of the purchased puts. |