37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
166 Part II: Call Option Strategies
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option investment, the writer who operates in large size will experience less of a
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commission charge, percentagewise. That is, the writer who is buying 500 shares
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of stock and selling 10 calls to start with will be able to place his stop points far
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ther out than the writer who is buying 100 shares of stock and selling 2 calls.
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Technical analysis can be helpful in selecting the stop points as well. If there is
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resistance overhead, the buy stop should be placed above that resistance. Similarly, if
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there is support, the sell stop should be placed beneath the support point. Later,
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when straddles are discussed, it will be seen that this type of strategy can be operat
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ed at less of a net commission charge, since the purchase and sale of stock will not be
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involved.
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CLOSING OUT THE WRITE
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The methods of follow-up action discussed above deal ,vith the eventuality of pre
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venting losses. However, if all goes well, the ratio write will begin to accrue profits as
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the stock remains relatively close to the original striking price. To retain these paper
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profits that have accrued, it is necessary to move the protective action points closer
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together.
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Example: XYZ is at 51 after some time has passed, and the calls are at 3 points each.
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The writer would, at this time, have an unrealized profit of $800 - $200 from the
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stock purchase at 49, and $300 each on the two calls, which were originally sold at 6
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points each. Recall that the maximum potential profit from the position, ifXYZ were
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exactly at 50 at expiration, is $1,300. The writer would like to adjust the protective
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points so that nearly all of the $800 paper profit might be retained while still allow
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ing for the profit to grow to the $1,300 maximum.
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At expiration, $800 profit would be realized ifXYZ were at 45 or at 55. This can
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be verified by referring again to Table 6-1 and Figure 6-1. The 45 to 55 range is now
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the area that the writer must be concerned with. The original profit range of 39 to 61
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has become meaningless, since the position has performed well to this point in time.
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If the writer is using the rolling method of protection, he would roll forward to the
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next expiration series if the stock were to reach 45 or 55. If he is using the stop-out
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method of protection, he could either close the position at 45 or 55 or he could roll
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to the next expiration series and readjust his stop points. The neutral strategist using
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deltas would determine the number of calls to roll forward to by using the delta of
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the longer-term call.
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By moving the protective action points closer together, the ratio writer can then
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adjust his position while he still has a profit; he is attempting to "lock in" his profit.
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As even more time passes and expiration draws nearer, it may be possible to move |