want to be bold when we enhance the trade. Wewant ratios of 1-to-3 or 1-to-4, never higher, as far above the old highs asfeasible and with the largest differential between the strikes of the spreadthat we can achieve. Here, boldness equals greed, and to no purpose. We’realready apparently on the way toward a good profit in our original trade,and adding a ratio-spread increases our risk in the event the bull resumesromping. Countering this is a very interesting historical fact: once past theirpeak, parabolic bull markets do not ever regain the old highs after the secondary upmove fails. Perhaps this has happened somewhere, sometime,but I can’t find a single example of such an occurrence anywhere in mydatabases.The Picador strategy, or rather, the El Toro Grande version of it, has adrawback and an inherent limiting factor. The drawback is that the initialput spread is very awkward to defend. We enter the debit put spread having a negative market view, which makes writing another, lower-strike, putin an attempt to recover all or part of our debit a rather self-contradictoryaction. Equally, if the market doesn’t move lower for whatever reason afterwe’ve entered our put spread, writing calls is far too risky to even consider.From these considerations, if we haven’t seen the downward market actionwe expect, over the first 25–35 days or half the life of the original put spreadposition, I suggest that we fold the trade and find another opportunity. Weprobably should also take a hard look at the particular dynamic of and resultant action in this market, with a view toward understanding why our tradedidn’t work this time, and toward improving the strategy in future. The goodnews when we fold the trade, though, is that our trading loss is quite smallby definition.The limiting factor is margin requirement. Our initial position, the debitput spread, is immune here, but any enhancement will expose us to what willunquestionably be an inflated requirement. We want to enhance the tradewhen possible, for this feature of the strategy is what makes it remarkably
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profitable. Moderate-ratio OOM/WOOM/WTBOOM ratio-spreads ordinarilyhave reasonable, even low margin requirements, but a recent runaway bullmarket is hardly “ordinary” in any sense of the word. We’ll be putting up afair amount of capital when we enhance the trade.Did I say “enhancement,” singular? If so, I misled you . . . sorry aboutthat. Once the bull’s back is provably broken, we’ll almost certainly be ableto replicate this strategy in subsequent months, even several times over perhaps a year or more, roughly along the lines of the coffee market examplein Chapter 11. The whole trick to profiting very handsomely by becoming apicador for El Toro Grande is: start small and don’t be early. If we wait totrade, or to enhance the trade, until we’re as certain as possible that the bullis well-done hamburger, toast, finito, and this delay should cost us some dollars, so what? We’re going to have a long time to exploit the bull’s demise,banking profits in each cycle.
Toro Poco—More Frequent, Less VolatileAnother factor that limits the usefulness of El Toro Grande is that opportunities to implement it are rare. We absolutely must witness the occurrenceof a runaway bull market before we can use it, and these come along, what,once every 3 or 4 years or so. Recently, we’ve had the 2000–2001 natural gasmarket, the 1995 grain markets, the 1994 lumber and coffee markets, coffeeagain in 1997 and a little bit in 1999, and probably a couple of others that I’veforgotten just now. There haven’t been very many in the past decade, in anycase.However, El Toro Grande has a little brother who shows up much moreoften. Mini-bull markets, or toros pocos as I call them, come along severaltimes a year, and, usefully, in a wider variety of markets than the big bull.These opportunities can be somewhat more difficult to spot, and they’reconsiderably more difficult to define in a general way, but let’s give it a try.The first requirement, of course, is that a market be undergoing a bull move,a rather specific kind of bull move.This condition varies a bit from market to market, but there is a usefulrule of thumb available. Take the overall IV of a market’s options on a nameddate. Here, let’s say this figure is 35% on an annualized basis. If, over a monthor six weeks, this market moves up half or more of that amount, in percentage terms, we have a possible candidate for a toro poco trade. Another condition we strongly want to observe is that this market’s options’ IVs haverisen, right along with the price. We are distinctly not interested, in this strategy, in a market that is gradually working higher and taking its sweet timeabout it. Further, this bull move should not be a direct result of U.S. weather,
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and, if possible, of weather anywhere else, either. This precondition will besomewhat restrictive regarding markets such as soybeans, in which weathersomewhere in the world is a factor in the market for the bulk of the year.Weather-driven markets are gamblers’ markets, and we avoid them whenwe’re trading to win.Clearly, our parameter for minimum upward movement is an arbitrarynumber. No pretense about it, this degree of movement is not and cannotbe the optimum amount for all markets. For markets that have high nativevolatility—our old friends coffee, natural gas, cocoa sometimes, lumber,maybe non-summer soybeans—the half-of-known-IV figure is just too low.These markets might move that much in a short time if someone sneezestwice on 8 consecutive days, and we’ll want to see a larger move here, perhaps 70–75% of annualized IV within the same short time frame.
Tactics and Timing for Toro PocoOur technique, trading tactics, and entry timing in the mini-bull market differ from those we use in El Grande, because the premise of the trade is different. When we’re dealing with the big bad bull, we want the market itselfto tell us when to push the button. For toro poco, all we want to do is to gainsome assurance that the present market isn’t going to become a runaway.Naturally, we never want to be in the position of trying to pick tops (or bottoms either, in other strategies), and to this end we’ll look for a developmentor an event that indicates the mini-bull won’t become parabolic. Again, I haveno quarrel with technical methods for determining a likely entry point in thisstrategy, but I don’t use them. Give me an old-fashioned supply/demand development every time. I might also draw an inference in the event of a rapiddrop in the open interest in the market, which would presumably suggest thatthe traders on the long side are exiting their positions and pocketing theirgains.We may want a different trading approach here also. Establishing debitput spreads is a sound and cautious tactic and is a favorite to succeed, giventhat our market view is even close to accurate. If we use this tactic, we’ll tendto buy a put with a striking price just under the market and write a put twostrikes below that, maybe three strikes if the put premiums are encouraging,that is, high. We also have the choice of taking a more aggressive stance without increasing risk too much. We can establish a ratio-spread below the market, then look to enter ratio-spreads above the market later on as the marketbegins to soften up.“Huh? How can you put on a ratio-spread below the market?” A fair question. In almost all cases, we use calls in ratio-spreads because the premiums
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of OOM call options can and do become wildly skewed, offering us an opportunity for an excellent ROC. In this strategy, and it’s one of very few occasions, we’ll use puts in the lower half, the put half, of the trade. We mayhave to resort to a 1-to-4 ratio in the puts here, because, as with any optionwriting strategy, we insist on an initial credit. Also, when entering ratiospreads, we insist that the striking prices of the two options in the spreadbe as widely separated as we can manage.In the other half of the trade, the calls, we should have little difficultyestablishing a disciplined ratio-spread in the OOM calls, for this market’scall options’ IVs are almost surely in the upper part of their 6-month range.Two other details apply here. First, we will not establish the call ratio-spreadwhen the call IVs are at or very near the top of their recent range. We’ll waituntil they’ve cooled off a bit, and we prefer in the best case to witness a topping-out or decline in SV and in the market price, too. Second, we will establish exactly two call ratio-spreads for each put ratio-spread, once ourtopping condition has been observed.In a mini-bull market, provided I’ve reasonable confidence from a supply/demand standpoint that a runaway bull is unlikely (or very unlikely, betterstill), I prefer enhancing the trade with low-ratio call ratio-spreads nicelyabove the market, ideally using a 1-to-3 ratio. Given that the call IVs of amini-bull market’s options have increased while the market has been moving higher, this tactic appears to offer the best overall expectation. This approach retains good chances of returning a very healthy profit if the marketcontinues moving higher, (but not running away), and also if the bull givesup the ghost shortly.One remaining thing is different about the call ratio-spreads we’ll employ in the mini-bull market. We want to shorten up the term of the trade,to no more than eight to twelve weeks, and five or six weeks is preferableif we can arrange it (this latter effort can be difficult, by the way). Whenwe ratio-spread over this shorter term, we must accept that we will notusually be able to find worthwhile premiums in options with strikingprices way out-of-the-money, as we would in a typical ratio-spread. That’sall right; we’ll take what the market gives us in terms of striking pricesthat meet our conditions. Much more important here is the differential between the striking prices, in the call portion of the trade. This we maximize, period.
Defense Against Getting Gored by the Mini-BullWe have established a fairly complex position, and you might tend to thinkthat defending it, when necessary, would also be complex. It isn’t really. Our
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defense here will be nothing more than a combination of defenses we’vepreviously applied.Defending the put half of the trade if the mini-bull dies and the market turns lower is a snap. Assume that the put half of our trade is in fact a1-to-4 ratio-spread. If the market moves down to the strike of the put weown, we’ll roll exactly two of the short puts out-and-down, at any point inthe first two-thirds of the term of the trade. If the market persists in goinglower, we’ll roll or flip out the remaining excess short put, preferring theflip defense to the roll, and we’ll sit quietly with the remaining single bearish put spread and defend the two further-out short puts later if required.Additionally, in this case, we’ll sell back our long calls at a point we deemconvenient, but not in the first couple of weeks of the trade. Why holdonto the long calls, after all? By hypothesis here, the calls we’ve writtenare now WOOM or nearly so, not just OOM (assuming we selected a reasonable strike to write), and will by this time be heavy favorites to expiremeekly now that the market has turned downward. If the market continues still lower, we’ll buy exactly one put at some convenient strike abovethe strike of the rolled-out puts, and replicate this defense in later monthsif need be.Defending the call side of the trade if the market keeps moving up is alittle different, but only a little. Rolling calls out-and-up during an insistentbull market can be, as noted before, fairly dicey and very aggravating in termsof committing more time and more capital to the defense than we’d like. I’minstead much more inclined either to exit the trade or to flip the calls intosome number of puts at some OOM or WOOM strike in the next one ortwo months further out. In our hypothetical 1-to-3 call ratio-spreads, I prefer to flip one of the short calls in each ratio-spread if the market movesabout two-thirds of the way from its initial price (the price on the day weentered the trade) toward the strike of the long call. The remaining excessshort call(s) will be flipped when the market moves above the strike of thelong calls. And, being consistent, I’ll sell back the long put too, probably alittle before I flip the second set of calls.These are reasonable and likely profitable defenses over the first twothirds of the trade, but when the trade becomes very short-dated, the timingof the defense changes a bit. Yes, we’ll still sell back the long put if the market has moved up, and the long calls if the market has worked lower. However, we should at least try to sit with the possibly threatened short positionfor a little while longer before flipping the excess shorts, a day or two orthree, in order to attempt to allow Sister Theta to gobble up some more ofthe remaining time premium. Make no mistake about it though, if the market won’t give us those extra days and keeps moving in whichever directionit’s now headed, we must defend the threatened side of the trade along thelines just indicated, and right quickly too.
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Never Take Your Eye Off the, Er, BullThe various shades of defense are not particularly important of themselves;we apply defense as necessary. What is important is that we keep our eye onthe bull. Whether in El Toro Grande or toro poco, one premise of the tradeis that the bull market, great or small, will not resume violently. If the premisehappens to be incorrect, which it historically never has been for the big bullgiven our adherence to the entry condition, but might be so for the mini-bull,we take steps —immediamente—to limit our risk. In a violently moving market, the principle of self-preservation when wrong is simple: bail or fail. Ifwe’re wrong in a trade in such a market, no matter the strategy we’re using,we must admit it right this minute and take an appropriate action to preserveour capital. We have precisely zero interest in becoming bullfighters.At bottom, this decision process for defense works out to be a matter ofnothing other than our good judgment. After all, we would not enter a tradein which we did not have an historical or statistical advantage, or both, atthe point of entry. Doubtless, a couple or three times in ten trials, we willmake a less-than-optimum selection of option strikes, or the market’s behavior will contradict our view. Such eventualities are not problems, unless welet them become so. To minimize these occurrences, we simply exercise agood degree of caution when we enter the trade, and, not surprisingly, bydoing so we also generate better results.Actually, given only that we’ve been disciplined in selecting an entrypoint, the problems we are likely to encounter are much more tactical thanstrategic. Curiously too, the big bull, El Grande, is less likely to expose usto tactical snags than is his little brother. When a runaway bull market hasfailed, as long as we refrain from being greedy, it is literally child’s play toturn a profit. Toro poco, though, as a rule is a product of less-well-definedmarket conditions, which, in turn, make our subsequent market decisionssomewhat more difficult.Now, I don’t want to misrepresent anything to you. The few opportunities I’ve had to spear a fading runaway bull market as it starts to die haveproceeded exactly as outlined, very profitably and with well-controlled risk.My practical experience with defending El Toro Grande is exactly zero. Thedefensive tactics previously discussed are therefore only theoretical. In thenext such trade, if defense becomes necessary, I’ll probably defend evenmore conservatively than indicated here.Enhancement to toro poco trades is situationally less dangerous, assuming only that we can establish the call ratio-spreads with a nice, wide differential between the striking prices. Defense in an enhanced trade, at leasttheoretically, should be an easier proposition, and to my experience to date,it usually is. However, one trade, in May 1999 soybeans in late 1998 caused
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some problems on defense. I was a little early in enhancing the trade, andMay soybeans rose a dime or so above the recent toro poco high. Margin requirement approximately tripled in about a week, using up the initial cushion, and out the window I could see our old nemesis, capacity risk, comingdown the street. I was a little lucky in that I had some extra free capital inthe account at the time, only because I hadn’t happened to find very manygood trades over the preceding month. My fault entirely, of course; I wasboth a little early and a little greedy even when entering the trade. I didnot—and this is a mistake, pure and simple, don’t do it—wait for the market’s volatility to begin to decline. Had I simply been disciplined in entering and enhancing the trade, the capacity risk monster would never havemade it into town, let alone been strolling along my street. Two weekslater, the mini-bull became seriously arteriosclerotic and I was able toscramble out of the trade with a tiny profit. Not worth the aggravation, Iguarantee you.This is definitely not the way to implement or enhance a toro pocotrade. A disciplined trader would have waited until the market volatilitystarted declining, entered the trade as described, and cashed out bothsides, perhaps having to roll out one or two put options for a month, aminor nuisance. A dandy profit was there for the taking, but the greedytrader, your humble servant, didn’t even get a sniff of it . . . and didn’t deserve it, either.
Wait for the WildnessThe last chapter of Peter Bernstein’s scholarly and marvelously readablebook, Against The Gods: The Remarkable Story of Risk (Wiley, 1998) is titled, “Awaiting the Wildness.” When we want to be picadores, we want tofirst await the wildness in a market, then await the beginning of its passing,and then help ourselves to a hefty profit. You may wonder a little bit thatthis chapter is comparatively short, but there you have the reason for it: thenecessary conditions for our becoming picadores are summed up perfectlyin the previous sentence and need little if any elaboration. Let the traders ina market become optimistic, even fantastically so, then let their ardor subside . . . and then stab them and the dying bull in the knee, in the heart, andespecially in the wallet. Several times.Now, I fully understand that most of the strategies I’ve written about,up to this point, do in fact require some—sometimes a lot of—patience onyour part to implement successfully. This probably shouldn’t be much of a
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surprise. After all, I’ve mentioned several times that we must allow the market participants a little time to fatten our trading accounts. Do I ever applyshort-term strategies? Sure, just not frequently. I discuss one of my favoritesin the next chapter.Here’s one of my favorites.
CHAPTER 13
Pay Meafter LunchThe Endplay
You can observe a lotta things by watchin’.Lawrence Peter “Yogi” Berra
n 1962, Edward O. Thorp wrote a remarkable book, Beat the Dealer(Random House), the first of its kind as far as I know. He programmedan extensive computerized analysis of the game of blackjack (no meanfeat in the 1960s, I assure you—we’ve all been spoiled by PCs by now). Thebook is partly a very readable analytical commentary and partly a series oftales about his and his colleagues’ adventures in attempting to put theircomputer-generated strategies into practice.One of the anecdotes in the book concerns an evidently very sharpchap who figured out, without any computerized assistance, a strategy togenerate an enormous statistical advantage at certain times in blackjack,provided that a couple of conditions existed. Hmm, that sounds familiar,doesn’t it? Thorp titled this strategy “The Endplay” because the possibilityof employing it occurs when there are only a few cards remaining in the deckor the dealing shoe. Casinos ultimately learned of this strategy and prohibited it, in effect testifying to its validity. Now, we’re not blackjack players (atleast not principally, I sincerely hope), but the good news is that there is anearly perfect correlate strategy available to us in our trading.
I
Nature Abhors a Vacuum—We Don’tWhat causes a market’s price to change? An influx of traders acting on presumably new information, correct? When the market participants are unsureof what might happen in the near term in their market—in other words,238
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when the quantity and quality of available and pending information is insufficient for the participants’ decision-making process, the more immediatelyvolatile that market tends to be. Examples of this are trivially easy to find.Perhaps the best-known examples in futures are in the grain markets fromlate spring to mid-late summer. Will it rain or won’t it, will the high-pressureridge move east or west or maybe south, can the commercial interestssqueeze the July contract? Questions like these abound, and absolutely nobody has the answers, so everyone is nervous and the volatility of these markets increases right along with the uncertainty as such questions arise. I’lltake a pass every single time on trying to trade markets that are in this condition. “‘That ain’t my style,’ said Casey,” in the famous poem, and good luckto you if these types of markets are your style.Ah, but what happens when the situation is reversed? What if, at somespecific time, there is exactly zero weather disruption or other external eventrisk to be feared? What if there is no immediate supply/demand news tomaterialize for a few days or longer? And what if, in the ideal case, the politicians are on vacation? In such a situation, wouldn’t the volatility of such amarket decline in very short order? This result would seem very likely,wouldn’t you say? Let’s sweeten the pot a bit. Suppose we have this type oftemporary news and event vacuum in a market, and also suppose the nearbyoptions only have a day or two left until they will expire. If such a marketalso has a high native volatility or its options’ IVs are high at the moment, weought to be able to fatten our trading account tidily and very quickly.We can realistically take one of two paths in this case. We can attemptto determine in which direction our news-vacuum market is likely to movein the next day or day and a half. We’ll write OOM puts if we think it is morelikely to move up, or OOM calls if we hold the opposite market view. Alternately, we may decide that the market will be essentially dead in the waterfor the remaining day or two of the options’ lives, and accordingly write anOOM strangle.As always, there are trade-offs between the two approaches. Writing astrangle will usually offer us a superior ROC compared to simply writing aput or a call, but the strangle has two possible risk points, the straight option write only one. The strangle is more capital-efficient in that we will manytimes be able to write options with striking prices further away from themarket in order to earn the same or more premium as writing a single option,and our margin requirement will therefore be smaller. Writing a strangle,though, increases our likelihood of having to defend the trade, of sitting ina modified trade for a month or more. If we are not inclined, due to historical price movement at this time or to current market conditions, to stay ina particular market for an extended defense, we should prefer writing thesingle option or looking for a different market to trade. When we don’t objectto staying in the market with a defensive position after our options expire,
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the strangle would seem to be statistically the better tactic. When we are correct about the postulated news/weather/event vacuum, the market we’re interested in really does tend to calm down and to hand us our trading profitright away.
Structural Difficulties and Restrictive Markets—Forewarned Is ForearmedThere are two inherent difficulties with the endplay strategy. In order for anendplay to be worth our time, capital, and effort, we are required to deal generally in high-volatility markets. This condition isn’t undesirable on its face.High-volatility markets offer us excellent opportunities at various times,but also pose a higher degree of basic market risk in the possibility of an untimely and radical price movement. The success of the endplay strategy is dependent on our being correct in our view that a market is about to see a newsand event vacuum for a day or two. If we err, if some serious market-movingdevelopment occurs, we must defend or exit the trade immediately. This possibility of error implies that we must do something I detest, namely, watchthe market closely over the term of the trade.Watching a market may be to a trader’s advantage. It’s almost essentialif your approach to trading involves swing trading or scalping. I’ve nothingagainst these methods, as long as they generate a profit for you, but I have adifferent advantage: I know that I’m no damned good at them. Unfortunatelyfrom my point of view at least, the nature of the endplay strategy may requirevery short-term trading as a defensive tool. We’ll see one such situation laterin this chapter.The second difficulty involves margin requirement and the rules of option expiration, but fortunately this difficulty exists in only a few markets.Some markets settle their contracts and options for cash. We don’t careabout these here; cash settlement eliminates such concerns along these lines.For markets that settle their contracts via delivery, it’s a different story. Now,most of these latter markets’ options expire well before the notice-of-deliveryperiod begins (when exchange margin requirements begin to rise, and wedon’t really want any part of delivery/redelivery, as noted earlier). These markets are very convenient for an endplay trade, assuming only that the necessary event/news vacuum exists. Grain and oilseed markets’ options expirewell before delivery becomes a consideration, but rarely offer us an opportunity except during weather-driven markets, and these are all yours, myfriend. I won’t touch them. The softs markets—coffee particularly, but occasionally cocoa and cotton too—present an occasional opportunity for us,and these markets’ options also expire well before the delivery period. CMEmeat markets are impossible regarding this strategy. Forget about them. The
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problems are too numerous to list. The COMEX/NYMEX gold market occasionally allows a good endplay, but we’re talking about once or twice in twoor three years.I haven’t yet found a worthwhile endplay trade in the interest rate markets, bonds, notes, Eurodollars, LIBOR, and so forth, but if these markets’volatility stays as historically high as it is this minute, something may turnup. Sadly, from an option writing standpoint, these markets’ absolute levelof volatility is low. I would suggest, without any practical experience here,that the one-sided version of the endplay will work better in these marketsthan the strangle. We’re likely to have to set the striking prices for a stranglefar too narrowly, and, consequently, to have to defend the trade more oftenthan we’d like. The IMM currencies, despite their relatively low overallvolatility, offer good one-sided endplays from time to time, but be preparedto attempt to make just $100–200 net per lot, rarely more.
Fun and Games in the Big Apple—When Is theTrade Over?This brings us to the energy markets, which undoubtedly offer us moreopportunities for endplay trades than any other class of market. However,we must be even more alert than usual when attempting an endplay in thesemarkets, because the rules of the New York Mercantile Exchange are a littlebit odd regarding option expiration. What happens with expiration, in mostmonths in the NYMEX energy contracts, is really quite fascinating . . . untilyou put your capital at risk.As Yogi Berra once famously said, “It ain’t over ’til it’s over,” andnowhere, nowhere, in the world of trading does this amusing tautologyapply more than in option expiration on most of the NYMEX energy contracts. If you aren’t a serious option trader, option writer especially, youmight very reasonably believe that when an option stops trading, it has expired by rule. Your view is perfectly sensible, but now, my friend, welcometo New York.Options on NYMEX energy contracts stop trading at the close of themarket on their scheduled last trading day. So far, so good, and utterly normal. But, by rule, they can be exercised by the owner of the options for another couple of hours after the close. This extension still isn’t a problem foroption writers. Fine, allow the option owners to exercise away, and morepower to them. The “gotcha” condition comes now. Unless the last tradingday for the options happens to be a Friday, the after-market NYMEX ACCESSsession opens for trading before the exercise period elapses. In plain English,if we’ve written an option that has, notionally, expired out-of-the-money, butonly by just a little bit at the market close, then, during the ACCESS session,
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the market can (and does occasionally, bet your life!) move so that thewritten option is now in-the-money. The $64,000 question is now: will thisoption be exercised, and will we be assigned a position?The answer is: probably, because almost every brokerage employs theso-called 1-tick rule. To protect careless traders who forget about optionsthey own, virtually all brokerages will exercise the option on behalf of theclient if it is even one tick in-the-money (ITM), unless they have received instructions from the client to the contrary. Good for the brokerages; they’relooking out for the client’s interests. It doesn’t help us, though. If the optionwe’ve written does move into the money early in the ACCESS session, wemay have a problem. The ugly part is that this problem can’t usually beresolved.What we’d like to do in this case, when the option we’ve written hasmoved into the money after the market close, is wait until the last few minutes before the option can no longer be exercised. If it’s ITM, we’ll buy a future to offset against a short call being exercised or sell a future to clear offa short put that might be exercised. If we do so, then, when the option is exercised, we’ll be assigned the opposite position, and we’ll end up flat, out ofthe market, which is exactly what we want. In theory, that’s the way thingswill proceed. Would that matters were so straightforward.In any market that has an afternoon after-market session, occasionally,the after-hours market will move so that our short option is just a little bitITM, 5 points perhaps in crude oil, or a half-cent in natural gas. Here’s a question for you: will the owner of the option exercise it under these conditions?“Hey, you said the brokerage automatically exercises ITM options at expiration! What’s the deal here? Of course the option will be exercised.” I did saythat, it’s absolutely true, and the brokerage will indeed exercise the option. . . unless the client has told them not to. There’s absolutely nothing to stopa trader from placing an order with his broker something like “Exercise 2CLZ 25.00 calls at expiration, only if CLZ is above 25.07.” Orders like this arefairly common, and, if you consider the point for a moment, you’ll see why.Some considerable fraction of the traders who buy options either don’twant the underlying futures position or don’t have enough trading capital tohold the position. If the option they own is only a tiny amount ITM, it maywell be the case that exercising their option and trading out of the futuresposition costs more than it’s worth to them, and they’ll simply abandon theoption. This is where our problem originates. At expiration, the exchangematches up long and short option positions, generally according to the lengthof time the long