-27-
difference between the exercise prices of the purchased and sold
puts, and the minimum value is zero.
According to Mr. Natenberg, the amount of money or credit that
Tandrill received upon the establishment of all six of its credit
spreads was always substantially outside (less than) the range of
values indicated by the Black-Scholes Model. In addition, the
amount of money or credit that Tandrill received upon closing out
the two debit spreads through Arbitrage Management was always
substantially outside (less than) the range of values indicated by
the Black-Scholes Model.
Mr. Natenberg analyzed Tandrill’s trades based on a comparison
of the trade prices with two numbers: The maximum possible value
of each vertical spread if held to expiration, and a price
evaluation of each spread using the Black-Scholes Model. See
appendix E for Mr. Natenberg’s Trade Analysis. Mr. Natenberg
concluded that Tandrill’s options trades were done at prices that
“practically ensured that they would result in a loss.”20
20 Mr. Natenberg gave as an example Tandrill’s first
trade, on Sept. 20, 1979, where the partnership sold the
97.50/97.625 put spread 47 times. He stated that if the price of
the underlying Treasury bill were at or below 97.50 at
expiration, the spread would have a maximum value of $58,750. If
the price of the underlying Treasury bill were at or above 97.625
at expiration, the spread would be worthless. At the time the
trade was made the Treasury bill price was 97.45. Because this
price was below 97.50, there was, in Mr. Natenberg’s opinion, a
far greater chance for the spread to be worth at expiration its
maximum value of $58,750 than its minimum value of zero. Thus,
according to Mr. Natenberg, the value of the spread should be
closer to $58,750 than to zero. Mr. Natenberg confirmed this by
(continued...)
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