38 lines
2.3 KiB
Plaintext
38 lines
2.3 KiB
Plaintext
72 Part II: Call Option Strategies
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The covered writer of the January 50 would, at this time, have a small unrealized loss
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of one point in his overall position: His loss on the common stock is 6 points, but he
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has a 5-point gain in the January 50 call. (This demonstrates that prior to expiration,
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a loss occurs at the "break-even" point.) If the stock should continue to fall from
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these levels, he could have a larger loss at expiration. The call, selling for one point,
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only affords one more point of downside protection. If a further stock price drop is
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anticipated, additional downside protection can be obtained by rolling down. In this
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example, if one were to buy back the January 50 call at 1 and sell the January 45 at
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4, he would be rolling down. This would increase his protection by another three
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points - the credit generated by buying the 50 call at 1 and selling the 45 call at 4.
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Hence, his downside break-even point would be 42 after rolling down.
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Moreover, if the stock were to remain unchanged - that is, if XYZ were exactly
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45 at January expiration - the writer would make an additional $300. If he had not
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rolled down, the most additional income that he could make, if XYZ remained
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unchanged, would be the remaining $100 from the January 50 call. So rolling down
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gives more downside protection against a further drop in stock price and may also
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produce additional income if the stock price stabilizes.
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In order to more exactly evaluate the overall effect that was obtained by rolling
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down in this example, one can either compute a profit table (Table 2-21) or draw a
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net profit graph (Figure 2-3) that compares the original covered write with the
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rolled-down position.
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Note that the rolled-down position has a smaller maximum profit potential than
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the original position did. This is because, by rolling down to a January 45 call, the
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writer limits his profits anywhere above 45 at expiration. He has committed himself
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to sell stock 5 points lower than the original position, which utilized a January 50 call
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and thus had limited profits above 50. Rolling down generally reduces the maximum
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TABLE 2·21.
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Profit table.
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XYZ Price at Profit from Profit from
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Expiration January 50 Write Rolled Position
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40 -$500 -200
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42 - 300 0
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45 0 +300
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48 + 300 +300
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50 + 500 +300
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60 + 500 +300 |