38 lines
1.9 KiB
Plaintext
38 lines
1.9 KiB
Plaintext
Cl,apter 24: Ratio Spreads Using Puts 359
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expire worthless and the result would be a loss of commissions. However, there is
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downside risk. If XYZ should fall by a great deal, one would have to pay much more
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to buy back the two short puts than he would receive from selling out the one long
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put. The maximum profit would be realized if XYZ were at 45 at expiration, since the
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short puts would expire worthless, but the long January 50 put would be worth 5
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points and could be sold at that price. Table 24-1 and Figure 24-1 summarize the
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position. Note that there is a range within which the position is profitable - 40 to 50
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in this example. If XYZ is above 40 and below 50 at January expiration, there will be
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some profit, before commissions, from the spread. Below 40 at expiration, losses will
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be generated and, although these losses are limited by the fact that a stock cannot
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decline in price below zero, these losses could become very large. There is no upside
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risk, however, as was pointed out earlier. The following formulae summarize the sit
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uation for any put ratio spread:
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Maximum upside risk
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Maximum profit
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potential
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= Net debit of spread (no upside risk if done for
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a credit)
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= Striking price differential x Number of long
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puts - Net debit (or plus net credit)
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Downside break-even price = Lower strike price - Maximum profit potential +
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Number of naked puts
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The investment required for the put ratio spread consists of the collateral
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requirement necessary for a naked put, plus or minus the credit or debit of the entire
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position. Since the collateral requirement for a naked option is 20% of the stock
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TABLE 24-1.
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Ratio put spread.
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XYZ Price at Long January 50 Short 2 January 45 Total
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Expiration Put Profit Put Profit Profit
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20 +$2,600 -$4,600 -$2,000
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30 + 1,600 - 2,600 - 1,000
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40 + 600 600 0
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42 + 400 200 + 200
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45 + 100 + 400 + 500
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48 200 + 400 + 200
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50 400 + 400 0
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60 400 + 400 0 |