Add training workflow, datasets, and runbook
This commit is contained in:
@@ -0,0 +1,38 @@
|
||||
114 Part II: Call Option Strategies
|
||||
spread strategy, however, would result in a total loss of $300 only if XYZ were below
|
||||
30 at October expiration. With XYZ above 30 in October, the long side of the spread
|
||||
could be liquidated for some value, thereby avoiding a total loss. The investor has
|
||||
reduced the chance of realizing the maximum loss, since the stock price at which that
|
||||
loss would occur has been lowered by 5 points.
|
||||
As with most investments, the improvement of risk exposure - lowering the
|
||||
break-even point and lowering the maximum loss price - necessitates that some
|
||||
potential reward be sacrificed. In the original long call position (the October 35), the
|
||||
maximum profit potential was unlimited. In the new position, the potential profit is
|
||||
limited to 2 points if XYZ should rally back to, or anywhere above, 35 by October
|
||||
expiration. To see this, assume XYZ is 35 at expiration. Then the long October 30 call
|
||||
would be worth 5 points, while the October 35 would expire worthless. Thus, the
|
||||
spread could be liquidated for 5 points, a 2-point profit over the 3 points paid for the
|
||||
spread. This is the limit of profit for the spread, however, since if XYZ is above 35 at
|
||||
expiration, any further profits in the long October 30 call would be offset by a corre
|
||||
sponding loss on the short October 35 call. Thus, if XYZ were to rally heavily by expi
|
||||
ration, the "rolled down" position would not realize as large a profit as the original
|
||||
long call position would have realized.
|
||||
Table 3-5 and Figure 3-2 summarize the original and new positions. Note that
|
||||
the new position is better for stock prices between 30 and 40. Below 30, the two posi
|
||||
tions are equal, except for the additional commissions spent. If the stock should rally
|
||||
back above 40, the original position would have worked out better. The new position
|
||||
is an improvement, provided that XYZ does not rally back above 40 by expiration.
|
||||
The chances that XYZ could rally 8 points, or 25%, from 32 to 40 would have to be
|
||||
considered relatively remote. Rolling the long call down into the spread would thus
|
||||
appear to be the correct thing to do in this case.
|
||||
This example is particularly attractive, because no additional money was
|
||||
required to establish the spread. In many cases, however, one may find that the long
|
||||
call cannot be rolled into the spread at even money. Some debit may be required.
|
||||
This fact should not necessarily preclude making the change, since a small addition
|
||||
al investment may still significantly increase the chance of breaking even or making
|
||||
a profit on a rebound.
|
||||
Example: The following prices now exist, rather than the ones used earlier. Only the
|
||||
October 30 call price has been altered:
|
||||
XYZ, 32;
|
||||
XYZ October 35 call, 1 ½; and
|
||||
XYZ October 30 call, 4.
|
||||
Reference in New Issue
Block a user