Newbie question

Quote from trader60611:

MTE - Thanks for the book recommendation. I will read it. Any other sources of ideas wuld be deeply appreciated. I am not trying to do something fancy. I am trying to hedge a position as simply as possible. On another note, Interactive brokers told me today they do not have Implied Volatility data (or historical volatility data) for their quotes on Globex British Pound Futures. And, when I try to access it in the chart window, the same message appears there. Can you reccommend a source for this data?

Your comments are great.

Manny
More...

I'm not aware of any free source for that, I got it from the Bloomberg terminal.
 
Quote from trader60611:

Pardon my ignorance, as I have always liquidated my options before expiry and never excercised.

You say:
at expiration:
if underlying > 2.0128 ( 1.9755 + 0.03733), profitable -> unlimited
if underlying = 2.0128 breakeven
if underlying < 2.0128 max loss of 0.03733 - (1.98 - 1.9755)

But.. I would assume if I excercised, that line 3 would be:

"if underlying < 2.0128 max loss of 0.03733 PLUS (not minus) (1.98 - 1.9755) "

as I am selling the futures contract for the 1.98 and I bought it for 1.9755, then deducting the option cost. If you are saying some other thing regarding expiry I am clueless. Could you please explain? I would be grateful. Sorry for the repeated questions.
More...

no it's minus, you sell it at 1.98 and bught it at 1.9755, so you have a gain of 0.005. You paid 0.03733 for the premium, minus the gain of 0.005, and that's how much you lost as the option expired worthless atm.

all these decimals is giving me a headache, will use some simple numbers. again all this applies only at expiration when the cost of your options is just the intrinsic value - the difference between the strike and underlying price.

say you buy the underlying at $95, buy the 100P at $15 (ITM)

Your break even is the price paid for the underlying $95 + the premium paid for the put(expires worthless) $15 = $110. So your underlying needs to move from $95(entry) to $110 just to break even.

Since the hedge is ITM, your max loss at expiration is when the underlying moves to ATM/ITM ($100 or lower) of your put.

Just use one of them option at expiration graphs to get a visual. Once you have that, look at the underlying price vs what it is at now and ask yourself if this hedge is good or not. There is no free lunch.

$120 +10
$115 +5
$110 0
$105 -5
$100 -10
$95 -10
$90 -10
$85 -10
..
$50 -10
 
I see what you mean by the "minus"

Net P/L of Long Stock and Put at Expiration =

MAX(0,StrikePrice-CurrentPrice)+(CurrentPrice-EntryPrice)-Premium
 
You must log in or register to reply here.
Back
Top