Hedging Commodities: A practical guide to hedging strategies with futures and options by Jovanovic Slobodan

Author:Jovanovic Slobodan [Slobodan, Jovanovic]
Language: eng
Format: epub
Published: 2015-02-18T22:29:00+00:00

Advantages ensuing from options flexibility:

Rolling-down long call options A protective call is a bearish strategy as the profit potential is on the downside. If the price of gold drops, there is more than one choice to close the trade. Firstly, you can take a gain by covering the short position and exit the trade. Secondly, you may opt for another alternative. Instead of exiting the trade at a profit you might consider to roll-down the call. Rolling-down would assume selling back the call you own and buying another one closer to the current gold price and with a later expiration date.

By rolling-down the long call, you maintain insurance against upside risk, while at the same time, as you continue being short, the position stays open to reaping benefits from the further price decline.

However, there are several factors to consider (besides the premium) when you are rolling the call: the expiration date, the strike price and the current price of the underlying. Since all the relevant parameters are instantly observable, the decision of whether or not to roll-up is based on a simple upfront calculation.

The mechanics of rolling the call are illustrated in the following example.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.