Trading Strategies Profit Making Techniques For Stock_3

80 OPTION STRATEGIES FIGURE 6.2 IBM HV-IV Themostobviousfirststrategytolookatwouldbeacoveredcallwrite. Let’s start with the idea of buying 100 shares and selling one contract of the Oct 115 calls. We would be receiving a premium of $2.50 and our greeks would be: Option Oct 115 C Premium Imp Vol 2.50 22.39 Delta Gamma .57 .0748 Theta Vega −.0789 .0919 Let’s now combine that with the underlying instrument to see what our net position is: Option Oct 115 C IBM Net Position Premium Imp Vol −2.50 22.39 115.55 $9,055 Delta Gamma Theta Vega −.57 −.0748 .0789 −.0919 1.00 .43 −.0748 .0789 −.0919 Selecting a Strategy 81 FIGURE 6.3 October Calls We would pay $11,555 for the 100 shares and receive $2,500 for our short call for a net investment of $9,055. However, the position is not ac-ceptable. We wanted to own the equivalent of 100 shares but we are only long 43 shares using this strategy. On the other hand, we like the theta and the vega. We always like the time decay working in our favor. And we have decided that we want to be short options because we think that the implied volatility is going to drop. The simple solution is to simply buy an additional 57 shares of the un-derlying IBM shares. This would give us a net position of: Option Oct 115 C IBM Net Position Premium Imp Vol −2.50 22.39 18,141 15,641 Delta Gamma Theta Vega −.57 −.0748 .0789 −.0919 1.57 1.00 −.0748 .0789 −.0919 Now we have exactly what we were looking for, a position that is long the stock in the correct amount but also short implied volatility and will 82 OPTION STRATEGIES receive positive time decay every day! However, we had to come up with an additional $6,586 to accomplish it. Let’s take another look at this same situation but let’s only focus on using options to see what we come up with. Still, we want to be long about 100 shares of the stock and be short implied volatility. This time, let’s try going long an in-the-money option instead of being long the stock. Let’s start with buying the 105 call. Option Oct 115 C Oct 105 C Net Position Premium Imp Vol −2.50 22.39 11.20 31.75 8,700 Delta Gamma −.57 −.0748 .94 .016 .37 −.0588 Theta Vega .0789 −.0919 −.0452 .0279 .0337 −.0640 In this case, we are having to come up with $8,700 to initiate the po-sition. We are not making as much on time decay but still have good ex-posure to a decline in implied volatility. However, we are only long the equivalent of 37 shares. One alternative would be to simply triple the po-sition which would put us long slightly more than 100 shares. We would then have to come up with $26,100 for the whole position but would have a large position in both time decay and implied volatility. Let’s try another approach. We can try selling the 120 C instead of the 115 C. Option Oct 120 C Oct 105 C Net Position Premium Imp Vol −.50 20.33 11.20 31.75 10,700 Delta Gamma −.20 −.059 .94 .016 .74 −.043 Theta Vega .0483 −.0658 −.0452 .0279 .0031 −.0379 Interesting. We had to come up with an additional $2 per share but we doubled our delta, basically eliminated time decay as a factor, but cut our exposure to vega by a third. Let’s take a look at the last three tables. The first choice, the covered call write is the most bullish and receives the most time decay and can capitalize the most on a decline in implied volatility. But we have to come up with the most amount of money. The second choice requires the least amount of money, about half of the first strategy. However, we receive half as much time decay which is fair given that we are investing half as much money. But notice that we are still receiving about 2/3 of the vega compared to the first strategy. We have gained a little efficiency here. We are getting a little more bang for Selecting a Strategy 83 our buck. In addition, it is quite possible that we have to go for the least expensive option because we don’t have a lot of money or we need to use what money we have to diversify into other positions. The final strategy allows us to cut our investment by about 1/3 but we get about 3/4 of the price action so we are getting more price action for our investment. However, we are getting virtually no time decay so we are actually getting less bang for our buck in this category. In addition, we are investing 1/3 less but getting roughly 2/3 less vega for our money. In sum, we are getting extra power on price action but significantly less action on time decay and vega. Which strategy should we select? I usually look for the strategy that gives me the most bang for the buck, in this case the second strategy. It’s not an easy decision because they are all fairly close. You will need to look at other factors to decide, particularly how much capital you have. NOW WHAT DO I DO? Time has ticked by for about a month. Let’s see where we are now (see Figure 6.4). Prices have moved down, then up, then down and we are pretty close to where we started. Prices didn’t really follow our plan of higher prices. Neither did the implied volatility. Figure 6.5 shows that implied volatility stayed very high even though historical volatility collapsed. But we are still bullish on the stock and even more bearish on implied volatility. Let’s now see how our three strategies are doing and try to figure out what to do with each of them. FIGURE 6.4 IBM Price Chart 84 OPTION STRATEGIES FIGURE 6.5 IBM HV-IV Strategy number one is now looking like this: Option Oct 115 C IBM Net Position and Profit/Loss Premium Imp Vol −3.50 27.33 18,141 +18.10 Delta Gamma −.61 −.0597 1.57 .96 −.0597 Theta Vega .0922 −.0907 .0922 −.0907 Basically, nothing has happened. We’ve made $18 (big deal!), the gamma dropped, time decay has increased, and vega is roughly the same. What about the strategy that gave us more bang for the buck: Option Oct 115 C Oct 105 C Net Position Premium Imp Vol −3.50 27.33 11.40 31.67 −$80 Delta Gamma Theta Vega −.61 −.0597 .0922 −.0907 .98 .006 −.021 .0081 .37 −.0591 .0901 −.0826 We’ve lost a grand total of $80, our delta is the same, the gamma is essentially the same, theta has almost tripled, and vega has increased. This position is even more set up for our scenario but has lost a little money. Finally, here is the third scenario: Option Oct 120 C Oct 105 C Net Position Premium Imp Vol −1.20 26.24 11.40 31.67 −$70 Delta Gamma −30 −.056 .98 .006 .68 −.050 Theta Vega .0766 −.0821 −.0210 .0081 .0566 −.064 ... - tailieumienphi.vn