|
PureBytes Links
Trading Reference Links
|
>you buy a July 1250 call at a price of only $4,200. You don't need to worry
>about a world crisis occurring overnight while you are asleep. The next
>morning, while placing the order for your new BMW, you are overcome with a
>feeling of pity for those futures traders who are hedged with puts but have
>a much larger than necessary part of their money tied up in margin
>deposits...<
Yet another case: at expiration market has not moved. All long options
strategies at or near the money lose near 100% of the premiums paid. You
roll over your e-mini for the price of commission and replace the stop. You
walk across the sandy beach into the blue surf. The warm tropical water
feels good, but a tear rolls down your face and you think sadly: "Poor
German surfer/traders....they must get in their BMW's and drive to France
just to get wet...."
:)
BW
>From: MikeSuesserott@xxxxxxxxxxx (MikeSuesserott)
>To: "Bob Fulks" <bfulks@xxxxxxxxxxxx>, "DH" <catapult@xxxxxxxxxxxxxxxxxx>
>CC: "Omega List" <omega-list@xxxxxxxxxx>
>Subject: Options - was:Globex2 in home
>Date: Wed, 4 Jul 2001 22:51:06 +0200
>
>
>I fully agree with Bob's post, but would like to bring up one important
>point. Here is one more case.
>
>Case 6: You have perused cases 1 through 5 and are now more than ever
>convinced of the value of options. Expecting the S&P to rise at least 20
>points within the next two weeks, you buy a July 1250 call at a price of
>only $4,200. You don't need to worry about a world crisis occurring
>overnight while you are asleep. The next morning, while placing the order
>for your new BMW, you are overcome with a feeling of pity for those futures
>traders who are hedged with puts but have a much larger than necessary part
>of their money tied up in margin deposits...
>
>It's true! Usually it is neither desirable nor advisable to go long an S&P
>futures contract and hedge this exposure by purchasing an S&P Put option.
>Why? Because the very same market position can be established by simply
>buying an S&P Call.
>
>These two positions are totally equivalent, including delta, gamma, time
>decay and all. And yet, in the first case S&P initial margin plus put
>premium will bind about $7,600 of the trader's capital, while the (totally
>equivalent) call position can be established for only $4,200, and even
>saves
>one trade's worth of commission and slippage.
>
>I have posted about this at length on the Realtraders list, where I also
>demonstrated a little-known method of using vector equations to find the
>correct option equivalents. Since these equivalents are usually overlooked
>I
>thought perhaps it might be helpful to at least mention the phenomenon
>here.
>
>Best,
>
>Michael Suesserott
>
>
> > -----Ursprungliche Nachricht-----
> > Von: Bob Fulks [mailto:bfulks@xxxxxxxxxxxx]
> > Gesendet: Wednesday, July 04, 2001 15:24
> > An: DH
> > Cc: Omega List
> > Betreff: Re: AW: Options - was:Globex2 in home
> >
> >
> > At 1:31 PM -0700 7/3/01, DH wrote:
> >
> > >Well, then we've gone in a big circle. The starting point of the
> > >exercise was to hedge the futures trade with options. If you cover your
> > >futures trade when the options are deep in the money, you're booking a
> > >big loss on the futures trade and *hoping* the big profit on your
> > >options position won't disappear before expiration.
> >
> > Let's consider several examples.
> >
> > Case 1: You are long one SP contract which has an equity exposure of
> > 1250 * $250 = $312,500 and are holding this position overnight. Some
> > world crisis occurs overnight while you are asleep. The next morning
> > futures open limit-down. The limit keeps moving down. You cannot get
> > out. Eventually, your broker liquidates your position with huge loss.
> > Soon after, the world comes to it's senses and the price moves back
> > to near where it started but you are out with the huge loss.
> >
> > Case 2: You are long one SP contract and long one SP futures Put with
> > a strike price 5% under the market in the same account. The crisis
> > occurs overnight, the market tanks, and your Put becomes
> > in-the-money. You account loss is limited to the 5% or about $15,000
> > which is less than your account balance. You broker does nothing. The
> > market comes back and your account recovers most of the loss. Some
> > time later you exit both positions.
> >
> > Case 3: As in Case 2 except that the market stays down and your Put
> > remains in-the-money. You now have to unwind the two positions in
> > some orderly way but there is no rush since your are "market-neutral"
> > so long as the Put is in-the-money. So you wait for some opportune
> > time and exit both positions. Your loss is limited to the 5%
> > ($15,000).
> >
> > Case 4: You are long one SP contract and long one SP futures Put with
> > a strike price 5% under the market in the same account. Nothing
> > unusual occurs in the market. You sell the Put position sometime
> > later with some loss in the time value. This loss is the "insurance
> > premium" you paid for the "insurance". But since you had the
> > insurance in place, you were able to trade larger positions and hold
> > positions overnight safely so you made enough more money trading the
> > larger positions than the insurance cost you.
> >
> > Case 5: Real estate is appreciating rapidly and you have an
> > opportunity to buy this rental property for a $312,500 with very
> > little of your own money. You buy the property and buy a fire
> > insurance policy to cover the value. The property doesn't burn down.
> > You sell the property later for $400,000. You made $87,500, less the
> > cost of the fire insurance. You obviously would not have even
> > considered doing without the insurance.
> >
> > Think about it...
> >
> > Bob Fulks
> >
> >
> >
> >
>
|