36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
298 Part Ill: Put Option Strategies
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Example: XYZ is 48 and the XYZ January 50 put is selling for 5 points. The profit
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that could be made if the stock were unchanged at expiration would be only 3 points,
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less commissions, since the put would have to be repurchased for 2 points with XYZ
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at 48 at expiration. Commissions for the buy-back should be included as well, to
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make the computation as accurate as possible.
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As was the case with covered call writing, one can create several rankings of
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naked put writes. One list might be the highest potential returns. Another list could
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be the put writes that provide the rrwst downside protection; that is, the ones that
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have the least chance of losing money. Both lists need some screening applied to
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them, however. When considering the maximum potential returns, one should take
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care to ensure at least some room for downside movement.
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Example: If XYZ were at 50, the XYZ January 100 put would be selling at 50 also and
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would most assuredly have a tremendously large maximum potential return.
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However, there is no room for downside movement at all, and one would surely not
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write such a put. One simple way of allowing for such cases would be to reject any
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put that did not offer at least 5% downside protection. Alternatively, one could also
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reject situations in which the return if unchanged is below 5%.
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The other list, involving maximum downside protection, also must have some
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screens applied to it.
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Example: With XYZ at 70, the XYZ January 50 put would be selling for½ at most.
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Thus, it is extremely unlikely that one would lose money in this situation; the stock
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would have to fall 20 points for a loss to occur. However, there is practically nothing
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to be made from this position, and one would most likely not ever write such a deeply
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out-of-the-money put.
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A minimum acceptable level of return must accompany the items on this list of
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put writes. For example, one might decide that the return would have to be at least
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12% on an annualized basis in order for the put write to be on the list of positions
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offering the most downside protection. Such a requirement would preclude an
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extreme situation like that shown above. Once these screens have been applied, the
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lists can then be ranked in a normal manner. The put writes offering the highest
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returns would be at the top of the more aggressive list, and those offering the high
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est percentage of downside protection would be at the top of the more conservative
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list. In the strictest sense, a more advanced technique to incorporate the volatility of
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the underlying stock should rightfully be employed. As mentioned previously, that
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technique is presented in Chapter 28 on mathematical applications. |