37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
228 Part II: Call Option Strategies
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that was described earlier in this chapter. Furthermore, assume that the deltas of the
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calls in question are .25 for the July and .15 for the April. Given that information, one
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can compute the neutral ratio to be 1.667 to 1 (.25/.15). That is, one would sell 1.667
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calls for each one he bought; restated, he would sell 5 for each 3 bought.
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This out-of-the-money neutral calendar is typical. One normally sells more calls
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than he buys to establish a neutral calendar when the calls are out-of-the-money. The
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ramifications of this strategy have already been described in this chapter. Follow-up
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strategy is slightly different, though, and is described later.
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THE IN-THE-MONEY CALENDAR SPREAD
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When the calls are in-the-money, the neutral spread has a distinctly different look.
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An example will help in describing the situation.
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Example: XYZ is trading at 49, and one wants to establish a neutral calendar spread
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using the July 45 and April 45 calls. The deltas of these in-the-money calls are .8 for
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the April and .7 for the July. Note that for in-the-rrwney calls, a shorter-term call has
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a higher delta than a longer-term call.
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The neutral ratio for this in-the-money spread would be .875 to 1 (.7/.8). This
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means that .875 calls would be sold for each one bought; restated, 7 calls would be
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sold and 8 bought. Thus, the spreader is buying more calls than he is selling when
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establishing an in-the-money neutral calendar. In some sense, one is establishing
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some "regular'' calendar spreads (seven of them, in this example) and simultaneous
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ly buying a few extra long calls to go along with them ( one extra long call, in this
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example).
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This type of position can be quite attractive. First of all, there is no risk to the
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upside as there is with the out-of-the-money calendar; the in-the-money calendar
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would make money, because there are extra long calls in the position. Thus, if there
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were to be a large gap to the upside in XYZ perhaps caused by a takeover attempt
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- the in-the-money calendar would make money. If, on the other hand, XYZ stays in
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the same area, then the regular calendar spread portion of the strategy will make
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money. Even though the extra call would probably lose some time value premium in
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that event, the other seven spreads would make a large enough profit to easily com
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pensate for the loss on the one long call. The least desirable result would be for XYZ
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to drop precipitously. However, in that case, the loss is limited to the amount of the
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initial debit of the spread. Even in the case of XYZ dropping, though, follow-up
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action can be taken. There are no naked calls to margin with this strategy, making it
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attractive to many smaller investors. In the above example, one would need to pay for
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the entire debit of the position, but there would be no further requirements. |