Case & Hedging Examples

1. Case &Hedging Examples

2. Delta – Neutral • Consider our strategy of a long Straddle: • A long Put and a long Call, both at the same exercise price. • What we are interested in is the Stock price movement, either way, and with symmetric returns.

3. Case: Pine Street Capital • Hedge Fund (HF) vs Mutual Fund (MF) • “Market-Neutral”/Positive-Alpha • “Market-Neutral” as a Simple Hedge: • Short the “Market” • Put the “Market”

4. Straddle Example • Intel at $20, with riskless rate at 3% and time to maturity of 3 months. Volatility for Intel is 35%. • Calls (w/ X=20) at $1.47 • Puts (w/ X=20) at $1.32

5. Straddle Example • Buy 10 calls and 10 puts • Cost = (10 * $1.47 * 100) + (10 * $1.32 * 100) • Cost = 2790

6. Straddle Example • Intel  $22, C = $2.78, P = $0.63 • Value = (10 * 2.78 * 100) + (10 * .63 * 100) • Value = $3410 • Gain = $620 • Intel  $18, C = $0.59, P = $2.45 • Value = (10 * 0.59 * 100) + (10 * 2.45 * 100) • Value = $3040 • Gain = $250 • More Gain to upside so actually BULLISH!

7. Delta - Neutral • Delta of Call is 0.5519 • Delta of Put is -0.4481 • Note: Position Delta = (10*100*.5519) + (10*100* -0.4481) = +103.72  BULLISH! • Delta Ratio is: 0.4481 / 0.5519 = 0.812 which means we will need .812 calls to each put (or 8 calls and 10 puts).

8. Delta - NeutralStraddle Example • Buy 8 calls and 10 puts • Cost = (8 * $1.47 * 100) + (10 * $1.32 * 100) • Cost = 2496 Note: Position Delta = (8*100*.5519) + (10*100* -0.4481) = -6.65  Roughly Neutral

9. Delta - NeutralStraddle Example • Intel  $22, C = $2.78, P = $0.63 • Value = (8 * 2.78 * 100) + (10 * .63 * 100) • Value = $2854 • Gain = $358 • Intel  $18, C = $0.59, P = $2.45 • Value = (8 * 0.59 * 100) + (10 * 2.45 * 100) • Value = $2922 • Gain = $426 • Now Gains roughly symmetric; delta-neutral