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OK I havent worked it out but when I think about it I come up with this:
when long 10 calls and 10 puts you are delta neutral but long 20 contracts
worth of gamma.
when long 10 calls and short 5 futures your are delta neutral but long only
10 contracts worth of gamma.
if the underlying rises in the first case the gamma will make you
increasingly long at this roughly 20 contracts rate.
if the underlying rises in the second case the gamma will make you
increasingly long at only roughly 10 contracts rate.
Thus the p&l profile of these positions is not equal. To equalise them you
need to buy 20 calls and sell 10 futures.
Sounds plausible to me :)
R
-----Original Message-----
From: Ira Tunik [mailto:ist@xxxxxx]
Sent: 11 December 2000 15:00
To: realtraders@xxxxxxxxxxx
Subject: Re: AW: [RT] Re: Trading Events
The math appears to be 10 at the money calls or puts at 50 deltas would
would
equal 500 shares of stock of 5 futures. Long 10 puts and long 10 calls
would
make you long 50 deltas and short 50 deltas per contract and therefor long
or
short 500 shares of stock or 5 contracts. This assumes that there straddle
is
at the money and the price of the underlying is at the strike price. In
actuality, the put will always have less deltas then the calls because of
the
converstion/reversal. In my book that makes it 10 calls and 500 shares or
5
of the underlying. If there is an error here please let me know. Ira.
MikeSuesserott@xxxxxxxxxxx wrote:
> Robert,
>
> though I don't consider myself a guru of anything, I do trade options
> professionally, and I have seen this misconception come up several times
on
> this list. To clarify once again: suppose you consider a long straddle
> consisting of 10 calls and 10 puts. To make for an *equivalent* position,
> you would need to buy 20 calls and sell 10 futures contracts - not 10 and
5!
> Just do the math, and you'll see for yourself.
>
> Thus, being long 20 option contracts in both cases, you have exactly the
> same Vegas (sensitivities to volatility changes) in the central areas of
> both positions. Even the Thetas (sensitivities to time decay) are
virtually
> the same.
>
> Differences arise in the follow-up strategies, of course. Orders in the
> underlying are usually easier to handle due to better liquidity, and the
> bid/ask spread, as a rule, will be tighter. On the other hand, margin for
> the underlying is often a multiple of what you would pay for the options,
so
> if you want to hold the position for some time this would have to be taken
> into consideration, too. This is especially true for equities, where the
> money outlay can be a real drain on your capital available for trading.
>
> Regards,
>
> Michael Suesserott
>
> -----Ursprungliche Nachricht-----
> Von: Robert Hodge [mailto:r-hodge@xxxxxxxxxxxxxxx]
> Gesendet: Sunday, December 10, 2000 21:56
> An: realtraders@xxxxxxxxxxx
> Betreff: RE: [RT] Re: Trading Events
>
> Perhaps a cheaper way is to buy either the put or the call and take an
equal
> and opposite position in the relevant futures contract (eg buy a call and
> short the future). I think this would be less sensitive to any (likely)
fall
> in implied vols after the tension is released by the news coming out while
> still having the same fundamental characteristics as a straddle.
>
> Perhaps an options guru can correct me though :)
>
> Regards,
>
> Robert
>
>
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