35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
282 Part Ill: Put Option Strategies
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if xyz is at 52 at expiration, the call will be worth 2 points and the put will be wort Ii
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8 points. Alternatively, if the stock is at 58 at expiration, the put will be worth 2 points
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and the call worth 8 points. Should xyz be above 60 at expiration, the combination's
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value will be equal to the call's value, since the put will expire worthless with XYZ
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above 60. The call would have to be worth more than 10 points in that case, since it
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has a striking price of 50. Similarly, if xyz were below 50 at expiration, the combi
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nation would be worth more than 10 points, since the put would be more than 10
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points in-the-money and the call would be worthless.
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The speculator has thus created a position in which he cannot lose money,
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because he paid only 7 points for the combination (3 points for the call and 4 points
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for the put). No matter what happens, the combination will be worth at least 10
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points at e:x-piration, and a 3-point profit is thus locked in. If xyz should continue to
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climb in price, the speculator could make more than 3 points of profit whenever xyz
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is above 60 at expiration. Moreover, if xyz should suddenly collapse in price, the
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speculator could make more than 3 points of profit if the stock was below 50 by expi
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ration. The reader must realize that such a position can never be created as an initial
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position. This desirable situation arose only because the call had built up a substan
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tial profit before the put was purchased. The similar strategy for the put buyer who
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might buy a call to protect his unrealized put profits was described in Chapter 16.
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STRADDLE BUYING
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A straddle purchase consists of buying both a put and a call with the same terms -
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sarne underlying stock, striking price, and expiration date. The straddle purchase
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allows the buyer to make large potential profits if the stock moves far enough in
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either direction. The buyer has a predetermined maximum loss, equal to the amount
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of his initial investment.
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Example: The following prices exist:
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xyz common, 50;
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XYZ July 50 call, 3; and
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XYZ July 50 put, 2.
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If one purchased both the July 50 call and the July 50 put, he would be buying a
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straddle. This would cost 5 points plus commissions. The investment required to
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purchase a straddle is the net debit. If the underlying stock is exactly at 50 at expi
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ration, the buyer would lose all his investment, since both the put and the call would
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expire worthless. If the stock were above .55 at expiration, the call portion of the |