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 CAC 40 Ratio BackSpread
Issued on February 03 2012 par Maw
Ratio Back Spread using French Index Options
Ratio Back Spread is a directional options strategy that enables to get the direction wrong if the movements are large.
I – Situation Every news shows up a bad situation. Financial crisis seems to stay on the the road, and there is no ways to fix it quickly. II – The strategy Ratio back spread can be built delta neutral, providing a position that is long gamma / long vega on the upside, and prgressively short on the downside. June future settled at 3333 last friday. Our strategy can be described as : - selling 5 3200 June 12 calls for a premium which is worth 262.20 hence a credit of : (5).(10).(262.20)= € + 13110 - buying 8 3500 June 12 calls 3500 for a premium which is worth 101.30 thus a debit of (8).(10).(122.80) = € - 8104 The net credit is 13110-8104 = € +5006 Quantities are set in order to be delta neutral - the delta of the 3500 call is 0.469 - the delta of the 3200 call is 0.724 III – Quotes  IV – Expected P&L Using delta and gamma, one can set an expected P&L of :  This is without taking the skew into account. Implied volatility surface :  Using our own interpolation we get : - Implied volatility for the 3500 call is 25.07% - Implied volatility for the 3200 call is 29.55% This leads to a theorical loss of € 243.24 if bid / ask spread is taken into account.  Finally, we have :  See you next week for the first update. Next : CAC 40 Ratio BackSpread ( 1st Update ) Maw |
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