This may not be the correct forum for this question. It is about a Put option I bought along with a long position in British Pound Futures. In previous trades, when my position went against me, I could usually count on making up about 1/3 of it in option gains. This time the option gain has made up only about 1/10 of the futures loss. Can someone tell me what I did wrong and how to correct my error? If you can make it as simple as possible, that would help. Here are the details: Futures Position (Long GBP, June) Entry: 1.9755 Current: 1.95885 Difference: - .02070 P/L â1293.75 Option Position (June 1.98 PUT) Long Entry 0.03733 Current: 0.03929 Difference: .00196 P/L $122.5
There're not enough details to give you a full answer, but the most likely reason for the "underperformance" is the decrease in implied volatility.
MTE - thank you for your help. I sure appreciate it. Is there something I should look for in the future that would make a married Put more helpful to the position ? I guess I am a little confused as , in general, the "married put" is, I assumed, the very basic reason why options were invented. If they don't help anyone, why do people use them and reccomend them?
Ok, I had a look at the IV chart and based on what I see the IV has dropped by about 100 basis points in the last week or so, which confirms my intial reply. Married put works at expiry! You need to hold the position to expiry to have a fully hedged position (less premium paid, of course). Prior to expiry, things like implied volatility and time to expiry (or in one word, extrinsic value) affect the behaviour of the option premium. An ATM put has a delta of 0.40-0.50, which means that you are only half-hedged (assuming all the other factors remain the same, like implied volatility). To use options effectively you really need to understand what drives their value and how, otherwise you eventually end up with such unpleasant surprises.
MTE - Thanks again. Would buying an option closer to expiry give me more "bang for the buck"? Would you know how to access an IV chart on Interactive Brokers? I have a lot of difficulty with their help screens. Even if I found it, would knowing the "past" help me decide the "future" (i.e. if I should buy a Put)? Thank you so much for your input. I am used to getting insulted on this site.
It's not as simple as buying closer to expiry. Can't help you with IB, maybe someone else will. Once again, no, it's not as simple as There's a lot more to it. I sense that you really lack knowledge in the options department. I suggest you read "Option volatility & pricing" and some other books recommended on this site in the books section.
MTE - Thanks for the book recommendation. I will read it. Any other sources of ideas wuld be deeply appreciated. I am not trying to do something fancy. I am trying to hedge a position as simply as possible. On another note, Interactive brokers told me today they do not have Implied Volatility data (or historical volatility data) for their quotes on Globex British Pound Futures. And, when I try to access it in the chart window, the same message appears there. Can you reccommend a source for this data? Your comments are great. Manny
I am not too familiar with fx, but assuming the position size is the same. You can do the following. at expiration: if underlying > 2.0128 ( 1.9755 + 0.03733), profitable -> unlimited if underlying = 2.0128 breakeven if underlying < 2.0128 max loss of 0.03733 - (1.98 - 1.9755) before expiration, the values in play will depend on IV as mte said, and also you are losing value on the atm put due to time decay, look at theta that's how much you are losing each day. Also google delta neutral hedging, you dont have to do it but it will let you understand how the movement affects the hedge etc...which will answer your question.
Pardon my ignorance, as I have always liquidated my options before expiry and never excercised. You say: at expiration: if underlying > 2.0128 ( 1.9755 + 0.03733), profitable -> unlimited if underlying = 2.0128 breakeven if underlying < 2.0128 max loss of 0.03733 - (1.98 - 1.9755) But.. I would assume if I excercised, that line 3 would be: "if underlying < 2.0128 max loss of 0.03733 PLUS (not minus) (1.98 - 1.9755) " as I am selling the futures contract for the 1.98 and I bought it for 1.9755, then deducting the option cost. If you are saying some other thing regarding expiry I am clueless. Could you please explain? I would be grateful. Sorry for the repeated questions.