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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: TobagoJack who wrote (39515)10/12/2003 9:57:36 AM
From: Haim R. Branisteanu  Read Replies (2) of 74559
 
Jay there are the classic one that Dolinar described but not available to the retail investor, as the margin requirements are making them quite expensive.

I was toiling with deep in the money options FX and it's efficiency is superior to that described by Dolinar.

It has to do with DELTA hedging in an elaborate portfolio not as a standalone transaction.

Further right timing could also reduce the actual price of the transaction. The limitation are the limited hedge you achieve in exchange of the flexible DELTA.

If you have a option calculator you can see the superior DELTA adjustments in a let say buying a -200 pips call and selling a -550 pips call for one week. The option is cheaper than out right -200 pips put, and DELTA hedging is superior by around 0.08% which is substantial for a -200 pips put or call.

The other aspect of this transaction is that you receive 350 pips in USD which will depreciate further if the EUR rises - a feature you do not have in buying a plain vanilla put.

It is true that the transaction is similar to buying a -200 put and selling a -550 put but for short maturity the -550 put is almost worth less and the spread eats up all potential appreciation.

Actual pricing for Oct 20, 2003:

- 200 Put 23 -200 Call 216
- 500 Put 0 -500 Call 489 Net Spread 28 Cash 272 pips @ 3% volatility equals in cost to the plain vanila put
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