25 lines
1.5 KiB
Plaintext
25 lines
1.5 KiB
Plaintext
230 • The Intelligent Option Investor
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In this case, you might choose to sell a single $195–$240 call spread, in
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which case your maximum exposure would be $4,500 [= 1 × (240 – 195) × 100]
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at the widest spread. This investment would have a leverage ratio of approxi-
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mately 1:1. Alternatively, you could choose to sell two $195–$220 spreads, in
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which case your maximum exposure would be $5,000 [= 2 × (220 − 195) ×
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100], with a leverage ratio of approximately 2:1. Which choice you select will
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depend on your assessment of the valuation of the stock, your risk tolerance,
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and the composition of your portfolio (i.e., how much of your portfolio is al-
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located to the tech sector, in this example of an investment in IBM). Because
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the monetary returns from a short-call or call-spread strategy are fixed and
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the potential for losses are rather high, I prefer to execute bearish investments
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using the long-put strategy discussed in the “Gaining Exposure” section.
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With this explanation of the short-call spread complete, we have all the
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building blocks necessary to understand all the other strategies mentioned
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in this book. Let’s now turn to two nonrecommended complex strategies
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for accepting exposure—the short straddle and the short strangle—both of
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which are included not because they are good strategies but rather for the
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sake of completeness.
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Short Straddle/Short Strangle
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Short Straddle
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RED
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Downside: Overvalued
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Upside: Overvalued
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Execute: Sell an ATM put; simultaneously sell an ATM call spread |