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Because Tandrill’s options trades in the aggregate generated
a credit, its put positions could suffer an unfavorable price
movement and still provide Tandrill with an overall profit.
Further, Tandrill’s put positions provide it with the ability to
absorb some of the risk in its futures positions. That is, the put
positions could, in the aggregate, move unfavorably by $25,004
before Tandrill suffered a net loss. Thus, $25,004 could be used
as a cushion to absorb losses in the short futures positions (if
the price of the short futures positions increased rather than
decreased).
Tandrill’s Portfolio Trading Strategy
Tandrill’s initial trading strategy was to build a portfolio
of Treasury bill put option credit spreads and short futures
positions in Treasury bills. During this period, Tandrill closed
some of its short commodity futures positions at a profit. For
example, on October 3, 1979, it closed two of its short futures
contracts (December) at 88.80 and two more on October 8 at 89.90--a
profit before commissions of $9,000. Mr. Borst stated that
interest rates were rising at the time Tandrill closed out its
short position, as evidenced by the fact that the closing price of
the short futures contracts in October was lower than the price of
the contracts when they were entered into in September. But
Tandrill did not simultaneously close its put positions obtained on
September 20. Mr. Borst believed that this was understandable
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