36 lines
2.1 KiB
Plaintext
36 lines
2.1 KiB
Plaintext
156 Part II: Call Option Strategies
|
||
that if XYZ is anywhere between 60 and 70 at expiration, the stock will be called away
|
||
at 60 against the sale of the October 60 call, and the October 70 call will expire worth
|
||
less. It makes no difference whether the stock is at 61 or at 69; the same result will
|
||
occur. Table 6-5 and Figure 6-3 depict the results from this variable hedge at expira
|
||
tion. In the table, it is assumed that the option is bought back at parity to close the
|
||
position, but if the stock were called away, the results would be the same.
|
||
Note that the shape of Figure 6-3 is something like a trapezoid. This is the
|
||
source of the name "trapezoidal hedge," although the strategy is more commonly
|
||
known as a variable hedge or variable ratio write. The reader should observe that the
|
||
maximum profit is indeed obtained if the stock is anywhere between the two strikes
|
||
at eiqJiration. The maximum profit potential in this position, $600, is smaller than the
|
||
maximum profit potential available from writing only the October 60's or only the
|
||
October 70's. However, there is a vastly greater probability of realizing the maximum
|
||
profit in a variable ratio write than there is of realizing the maximum profit in a nor
|
||
mal ratio write.
|
||
The break-even points for a variable ratio write can be computed most quickly
|
||
by first computing the maximum profit potential, which is equal to the time value
|
||
that the writer takes in. The break-even points are then computed directly by sub
|
||
tracting the points of maximum profit from the lower striking price to get the down
|
||
side break-even point and adding the points of maximum profit to the upper striking
|
||
price to arrive at the upside break-even point. This is a similar procedure to that fol
|
||
lowed for a normal ratio write:
|
||
TABLE 6-5.
|
||
Results at expiration of variable hedge.
|
||
XYZ Price at XYZ October 60 October 70 Total
|
||
Expiration Profit Profit Profit Profit
|
||
45 -$2,000 +$ 800 +$ 300 -$900
|
||
50 - 1,500 + 800 + 300 - 400
|
||
54 - 1,100 + 800 + 300 0
|
||
60 500 + 800 + 300 + 600
|
||
65 0 + 300 + 300 + 600
|
||
70 + 500 - 200 + 300 + 600
|
||
76 + 1,100 - 800 300 0
|
||
80 + 1,500 -$1,200 700 - 400
|
||
85 + 2,000 -1,700 - 1,200 - 900 |