GHB, follow-up to your options question:
Being somewhat of an options simpleton, can you explain what is meant by,
1) "Long 8 SEP50C" or
2) "Short 2 SEP40C"?
Does this mean buy,
1) buy 8 sep50 call contracts
2) sell 2 sep40 call contracts
If so, how did you come up with the specific number of contracts? If not, please explain.
Practically speaking, I don't anticipate you (or anyone else) will establish a trade without fully understanding the mechanics. Unless ratio spreads are second-nature, "go with what you know." Not to dodge your questions, here goes:
A) Yes, here "long" = buy, "short" = sell.
Refering to the related post,
siliconinvestor.com
The example in question is:
Long 3 SEP50C, Short 2SEP40C.
B) The ratio was arrived by comparing the DELTAs of the two calls, which at the time were ~.60 for SEP40C and ~.40 for SEP50C. Therefore, in order to create a "delta neutral" position, you would need to buy 6 SEP50C and sell 4 SEP40C (or any 1.5:1 ratio). To simplify, 3 and 2 have been used.
[DELTA is the change in option value for a 1 point change in the price of the underlying asset. Delta can be computed using any number of software programs.]
Even if you are not a "delta neutral" fan, the 3:2 ratio conforms nicely to your aggressive and very bullish outlook. Such a tight ratio will increase the initial debit position and is less of a downside hedge, but offers much better leveraged toward the upside.
Hopefully, I haven't created more questions than answers. |
