Option Strategies for global macro trading – Part 2
Below are some further strategies which are typical of Granite Hills Investments for its global macro strategies.
They can be divided into two main categories:
1. Underlying market is expected to move significantly (up or down) during the lifetime of the options.
2. Underlying market is expected to move (up or down) but within a tighter price range during the lifetime of the options.
Example 3: Significant increase in price expected
Granite Hills Investments published this trade on 14th June 2012 expecting a strong rally in the Eurostoxx 50. To get long exposure at a low cost the following structure was used:
Breaking the trade into its constituents we find:
a. Buying the call option with a strike price of 2200 is giving us our exposure to rising markets. The market exposure is 22,000
b. Selling the put option with a strike price of 2150 is a way of financing the long call. When a put is sold, (i.e. the investor receives the option premium), and the underlying market increases the investor is able to hold onto the premium.
c. Buying the put with 1950 strike is the insurance policy. This put protects any further losses below this level.
d. To calculate what the maximum loss is going to be on this particular trade we can see the following. If against expectation the Eurostoxx 50 index drops to 1700:
Attachment 3916
e. Therefore, the maximum possible loss on this trade would have been 2,255.
f. Comparing this strategy to the basic long call strategy in example 1 above the first most noticeable feature is that this more aggressive structure while increasing the maximum loss comes at a significant discount (915 for the call alone versus 255 for the complete structure). Therefore if the conviction is very high for a significant increases in the market this type of option strategy makes sense.
This particular trade was implemented on the 14th June 2012 for the total cost of 255 and after a sharp rally in the Eurostoxx 50 was closed on the 29th June 2012 for 801 making a total profit of 546 per option or 314.12%.
Putting this into a portfolio context where only 5% of the total portfolio capital is put at risk on any individual strategy, this strategy contributed a return of 10.71% to the total strategy portfolio.
Example 4: Moderate price increase expected
If the market is only expected to increase by around 5% to maximise the potential profit reducing the entry cost makes sense. If the investor was to purely buy a call option and the market only increased by 5% the amount profit after the cost of the call option would greatly diminish the overall profit. With the belief that the market is only going to increase by up to 5% a good strategy is to sell a call 5% above the current market level while buying a call a current market levels. This is also known as a call spread.
An example of this kind of strategy was implemented by Granite Hills Investments in February 2012. The underlying market was the US 10 Year bond market (T-Note)
The following construction was used:
Attachment 3918
Breaking the trade down into its constituents shows the following:
a. Buying the call option with a strike price of 131.50 gives a market exposure of $131,500.
b. Sell the call option at 133.50 means that any price increases above this level will not add any further profit.
c. The maximum loss that this trade can have is equal to the cost of the call purchased the premium received from selling the call.
d. For only moderate increases in price such a strategy makes sense as the opening cost is reduced by selling a call option. Buying the call option on its own would have cost $1200 but this structure has a total of $840 therefore enhancing the potential profit.
This particular trade was implemented on 7th February 2012 at a total cost of $840 per option. The position expired at the end of May with a value of $1580 making a profit of $740 per option or 88.10%.
Again putting this into a portfolio context where only 5% of the total portfolio capital is put at risk on any individual strategy, this strategy contributed a return of 4.4% to the total strategy portfolio.
2012-10-06 08:28:21
Source: http://www.traderslog.com/forum/showthread.php?t=21078&goto=newpost
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