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Strategies & Market Trends : Waiting for the big Kahuna

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To: Bilow who wrote (9222)	11/5/1997 10:20:00 PM
From: Joseph G.	Read Replies (1) of 94695

<< In the case of options on indexes, the underlying security is a future.>> Not true either. There are options on futures, they trade on different exchange and have different symbols and stettle in futures. Index options are traded on calculated indexes and settle in cash. The simple explanation for price deviations is that normally arbitrage is done for liquid contracts and there is a minumum deviation (like =/- a $) from the "fair" theoretical value that would trigger arbitrage. Hedging index options involves buying baskets of stocks, ultimately. They are also arbitraged between different contracts (different strikes, expirations, puts/calls), but this is not a "clean" riskless trade. Also, Euro type index options can be excersised only at perspiration, so no "real time" hedging is viable unless you trade (adjust the hedge) continuously till perspiration. Recent (last Mon) bust of a hedge fund, and the NYSE closing have also probably raised the threshold for theoretical arbitrage as higher risk is percieved to exist now. Joe

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