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Walt,
I tend to agree with most of your reasoning. However; after we get the
inevitable bounce, I would then expect a settling down at some point. That
would be when I'd be looking to buy. The options may degrade to maybe 4 to
5 hundred by then.
Regards,
Brent
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> From: Walt Downs <knight@xxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Re: Fut: Sugar etc
> Date: Monday, February 02, 1998 10:04 AM
> Brent,
>
> Against historical data, the options are cheap. However, in a way you
> are right. The volatility of the option is usually relative to the
> market (although not always. :) ). In this case, looking at what Sugar
> has done over the last year or so, I would agree with you.
>
> But, here are the things I am looking at:
>
> 1. The El Nino year was not overated. Coffee, Cocoa, Cotton and OJ
> have all enjoyed nice moves. (Although OJ was only recently.).
>
> 2. Of the tropicals, Sugar was the only one that did not have a
> substantial and sharp move, on a percentage basis. When a market starts
> looking like it is never going to move again, and most traders have
> lost interest, that is usually the time to start watching the
> commodity much more closely. (OJ was a good example of this.)
>
> Let's take a look at the trade I was talking about:
>
> You buy an ATM call and put for $550.00 each. You have 1 year to
> expiration, and the vol is low enough, that the options will retain
> their value well. Market at 11.00
>
> You now have 12 months for Sugar to trade to over/under 11.50 or 10.50,
> at which point, you should start seeing your first opportunites to
> either leg out of the profitable side of the spread, or turn the
> profitable side into a "free trade" by selling higher options against
> it.
>
> It's like sitting at a poker table, holding a pair of aces. By
> themselves, not necessarily a winning hand, but, what if some one
> told you that you could sit at the table and draw cards for a year.
> Your chances of drawing the 3rd and even 4th Ace seem reasonable.
>
> Like anything though, you have to try and time the trade. The technicals
> have to be there. :)
>
> You are right in that simply buying because vol was apparently low,
> would not be reason enough to take the trade.
>
> Walt
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