28 lines
2.0 KiB
Plaintext
28 lines
2.0 KiB
Plaintext
270 Part Ill: Put Option Strategies
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2½; plus he has spent two commissions to date and would have to spend two more
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to liquidate the position.
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At this point, the strategist may decide to do nothing and take his chances that
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the stock will subsequently rally so that the July 45 put will expire worthless.
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However, if the stock continues to decline below 45, the spread will most certainly
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become more of a loss as both puts come closer to parity.
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This type of spread strategy is not as attractive as the "rolling-up" strategy. In
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the "rolling-up" strategy, one is not subjected to a loss if the stock declines after the
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spread is established, although he does limit his profits. The fact that the calendar
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spread strategy can lead to a loss even if the stock declines makes it a less desirable
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alternative.
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EQUIVALENT POSITIONS
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Before considering other put-oriented strategies, the reader should understand the
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definition of an equivalent position. Two strategies, or positions, are equivalent when
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they have the same profit potential. They may have different collateral or investment
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requirements, but they have similar profit potentials. Many of the call-oriented
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strategies that were discussed in Part II of the book have an equivalent put strategy.
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One such case has already been described: The "protected short sale," or shorting the
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common stock and buying a call, is equivalent to the purchase of a put. That is, both
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have a limited risk above the striking price of the option and relatively large profit
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potential to the downside. An easy way to tell if two strategies are equivalent is to see
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if their profit graphs have the same shape. The put purchase and the "protected short
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sale" have profit graphs with exactly the same shape (Figures 16-1 and 4-1, respec
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tively). As more put strategies are discussed, it will always be mentioned if the put
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strategy is equivalent to a previously described call strategy. This may help to clarify
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the put strategies, which understandably may seem complex to the reader who is not
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familiar with put options. |