34 lines
1.5 KiB
Plaintext
34 lines
1.5 KiB
Plaintext
Mixing Exposure • 237
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Here we can see that for a long diagonal using 79-day ATM puts
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and 594-day LEAPS that are OTM by just over 15 percent, we are
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paying a net of only $25 per contract for notional control of 100
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shares. On a per-contract basis, at the following settlement prices,
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we would generate the following profits (or losses, in the case of the
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first row):
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Settlement Price ($) Dollar Profit per Contract
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Percentage Return on Original
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Investment (%)
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65 0 –100
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66 100 300
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67 200 700
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68 300 1,100
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69 400 1,500
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70 500 1,900
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71 600 2,300
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72 700 2,700
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73 800 3,100
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74 900 3,500
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75 1,000 3,900
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If the stock price moves up very quickly, it might be more beneficial
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to close the position or some portion of the position before expiration. Let’s
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say that my upper-range estimate for this stock was $75. From the preced-
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ing table, I can see that my profit per contract if the stock settles at my fair
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value range is $1,000. If there is enough time value on a contract when
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the stock is trading in the upper $60 range to generate a realized profit of
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$1,000, I am likely to take at least some profits at that time rather than wait-
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ing for the calls to expire.
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In Chapter 9, I discussed portfolio composition and likened the use
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of leverage as a side dish to a main course. This is an excellent side dish that
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can be entered into when we see a chance to supplement the main meal of
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a long stock–ITM call option position with a bit more spice. Let’s now turn
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to its bearish mirror—the short diagonal. |