-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...)Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Next
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