Add training workflow, datasets, and runbook
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Libby is really focusing on theta. It is currently about $0.03 per day but
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will increase if the put stays close-to-the-money. In two weeks, the time
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premium will have decayed significantly. A move downward will help, too,
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as the −0.419 delta indicates. Exhibit 5.11 displays an array of theoretical
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values of the put at eight days until expiration as the stock price changes.
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EXHIBIT 5.11 HOG 70 put values at 8 days to expiry.
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As long as Harley-Davidson stays below the strike price, Libby can look
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at her put from a premium-over-parity standpoint. Below the strike, the
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intrinsic value of the put doesn’t matter too much, because losses on
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intrinsic value are offset by gains on the stock. For Libby, all that really
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matters is the time value. She sold the puts at 0.85 over parity. If Harley-
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Davidson is trading at $68 with eight days to go, she can buy her puts back
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for 0.12 over parity. That’s a 73-cent profit, or $730 on her 10 contracts.
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This doesn’t account for any changes in the time value that may occur as a
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result of vega, but vega will be small with Harley-Davidson at $68 and
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eight days to go. At this point, she would likely close down the whole
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position—buying the puts and buying the stock—to take a profit on a
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position that worked out just about exactly as planned.
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Her risk, though, is to the upside. A big rally in the stock can cause big
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losses. From a theoretical standpoint, losses are potentially unlimited with
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this type of trade. If the stock is above the strike, she needs to have a mental
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stop order in mind and execute the closing order with discipline.
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