Option Strategies for global macro trading – Part 1
In June 2009 Granite Hills Investments started publishing its global macro trade strategies. These strategies aim to provide clients with ways to profit from markets as they move both up and down. So far the return on the strategy portfolio is 216.25%. The strategies are aimed at investors who want to have a global exposure to markets without having to spend an excessive amount of time sitting in front of monitors checking markets. This is achieved through a method of risk control described in this document and it is proven to work as you will see.
To be able to benefit from using these option strategies you first need the strategies. Granite Hills Investments is an independent global macro research and strategy business which prides itself through its own fundamental analysis of being able to identify opportunities in global markets. The performance proves it!
To sign up for a subscription to receive Granite Hills Investments global macro strategies for 400 per year please follow the link below:
http://www.granitehillsinvestments.com/
This document outlines the types of option strategies used to implement global macro strategies. It shows how depending on risk levels and potential profit levels you can employ different option strategies to best reflect the risks and profit potential.
Introduction:
Investing in global macro strategies implies investing mainly in large liquid markets. The underlying markets invested in are typically market level products such as the S&P500 equity index rather than individual securities such as stocks or bonds. There are a number of different types of products which can be used to implement global macro strategies including:
1. Options
2. Futures
3. ETF
4. Spread-betting products are becoming increasingly popular in some countries.
While the results should be broadly the same for each product, options offer a number of extra powerful features which makes them very suitable for implementing global macro strategies. The three main standout points for using options are:
1. Cost of access
2. Creation of payoff profile
3. Risk management
Options:
An option is a security which gives the holder of the option the right but not the obligation to buy/sell an underlying security at a specified price on a set future date.
There are two types of options on which all option strategies are based:
1. Call option gives the holder of the option the right but not the obligation to buy an underlying security at a specified price on a set date in the future.
2. Put option gives the holder of the option the right but not the obligation to sell an underlying security at a specified price on a set date in the future.
Option terminology:
Strike/Exercise price this is the price at which the underlying security can be purchased/ sold at the specified date in the future.
Expiry date this is the specified date at which the holder of the option decides whether to exercise the option.
Option Premium given that the buyer of the option is buying the right to do something at some date in the future this has a cost which is called the option premium.
Option exercise type options can be exercised in two ways depending on the style of option. The option style is determined by the exchange.
o European option the option can only be exercised on the expiry date.
o American option the option can be exercised any time the holder of the option chooses to.
While the option exercise type may seem confusing, however, for the purpose of implementing global macro trade strategies it is largely irrelevant in terms of the cost of the option but it is good to know what kind of option you are buying.
Example 1: Call option
An investor believes that between now and option expiry on 21st December 2012 that the S&P500 equity index will continue to rise. To implement this view the investor using options can do the following:
Buy a call option on the S&P500 future expiring on the 21st December 2012.
S&P 500 December future currently trading at USD1440
Attachment 3911
*The multiplier is set by the exchange and depends on the underlying product and exchange.
Q: What exactly has the investor purchased?
A: The investor has purchased the right but not the obligation to buy 1 future on the S&P500 December 2012 future.
Q: What is the market exposure that the investor has entered into?
A: The market exposure that the investor has bought into is the market value of 1 S&P500 future trading at $1440. This exposure = Index level X multiplier = $1440 X 100 = $144,000.
Q: What is the maximum risk for the investor?
A: The maximum risk for the investor is that at expiry of the option in December 2012 the S&P500 will be trading below $1440 and in that case the investor will have lost the total premium invested of $4000.
Conclusion:
Buy purchasing a call option on the S&P500 the investor has gained an exposure to 1 S&P500 future = $144,000. The cost of access is relatively low at $4,000 compared to $19,250 (derivative exchange initial margin requirement) for buying a future or $144,000 in cash to buy a portfolio of cash equities. With options the investor knows upfront what the maximum level of capital they can lose is i.e. $4,000 (the option premium). With a futures position or portfolio of cash equities the loss potential is uncertain. Furthermore, between now and option expiry the investor has full potential with any upside movement in the S&P500 which is expected.
Example 2: Put option
An investor believes that between now and option expiry on 13th November 2012 that the price of oil will fall. To implement this view the investor using options can do the following:
Buy a put option on oil future expiring on the 13th November 2012.
Oil December future currently trading at USD91.60
Attachment 3913
*The multiplier is set by the exchange and depends on the underlying product and exchange.
**there is often a large gap between option expiry and futures expiry for commodities. This is because physical delivery still often takes place.
Q: What exactly has the investor purchased?
A: The investor has purchased the right but not the obligation to sell 1 oil future on the December 2012 futures contract.
Q: What is the market exposure that the investor has entered into?
A: The market exposure that the investor has sold into is the market value of 1 oil future trading at $91.6. This exposure = Index level X multiplier = $91 X 1000 = $91,000.
Q: What is the maximum risk for the investor?
A: The maximum risk for the investor is that expiry of the option on 13th November 2012 oil will be trading above $91 and in that case the investor will have lost the total premium invested of $3230.
Conclusion:
Buy purchasing a put option on oil the investor has gained an exposure to 1 oil future = $91,000. The cost of access is relatively low at $3,230 compared to $5,600 (derivative exchange initial margin requirement). Physically shorting oil will not be possible for a private investor and if it was the cost would be huge. Also with options the investor knows upfront what the maximum level of capital they can lose is i.e. $3,230 (the option premium). With a futures position the loss potential is uncertain. Furthermore, between now and option expiry the investor has full potential with any downside movement in the oil price which is expected.
The above two examples represent the two most basic option strategies getting a long exposure to markets via call options and a short exposure to markets via put options. The two main benefits of using these option strategies is that they give the investor a relatively cost effective access to markets while they know exactly what the maximum downside is.
However, there are other option strategies which can be used by using combinations of the above strategies. Using combinations typically further reduces the opening cost. This can be done while keeping with the philosophy of always know your maximum risk level. Granite Hills Investments only ever publishes option strategies which can provide the investor with the ability to know exactly what the maximum loss is on any given strategy. By not knowing your maximum loss upfront you are potentially exposing yourself to very large losses. Hence Granite Hills Investments always follows the principle of Limited Risk Option Strategies (LROS). Knowing you maximum potential loss upfront makes investing a lot easier!
2012-10-06 08:28:13
Source: http://www.traderslog.com/forum/showthread.php?t=21077&goto=newpost
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