36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
198 Part II: Call Option Strategies
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the fact that all the losses will be small and the infrequent large profits will be able
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to overcome these small losses, one should do nothing to jeopardize the strategy and
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possibly generate a large loss.
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The only reasonable sort of follow-up action that the bullish calendar spreader
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can take in advance of expiration is to close the spread if the underlying stock has
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moved up in price and the spread has widened to become profitable. This might
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occur if the stock moves up to the striking price after some time has passed. In the
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example above, if XYZ moved up to 50 with a month or so of life left in the April 50
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call, the call might be selling for I½ while the July 50 call might be selling for 3
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points. Thus, the spread could be closed at I½ points, representing a I-point gain
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over the initial debit of 1/2 point. Two commissions would have to be paid to close
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the spread, of course, but there would still be a net profit in the spread.
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USING ALL THREE EXPIRATION SERIES
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In either the neutral calendar spread or the bullish calendar spread, the investor has
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three choices of which months to use. He could sell the nearest-term call and buy the
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intermediate-term call. This is usually the most common way to set up these spreads.
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However, there is no rule that prevents him from selling the intermediate-term and
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buying the longest-term, or possibly selling the near-term and buying the long-term.
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Any of these situations would still be calendar spreads.
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Some proponents of calendar spreads prefer initially to sell the near-term and
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buy the long-term call. Then, if the near-term call expires worthless, they have an
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opportunity to sell the intermediate-term call if they so desire.
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Example: An investor establishes a calendar spread by selling the April 50 call and
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buying the October 50 call. The April call would have less than 3 months remaining
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and the October call would be the long-term call. At April expiration, if XYZ is below
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50, the April call will expire worthless. At that time, the July 50 call could be sold
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against the October 50 that is held long, thereby creating another calendar spread
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with no additional commission cost on the long side.
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The advantage of this type of strategy is that it is possible for the two sales (April
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50 and July 50 in this example) to actually bring in more credits than were spent for
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the one purchase (October 50). Thus, the spreader might be able to create a position
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in which he has a guaranteed profit. That is, if the sum of his transactions is actually
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a credit, he cannot lose money in the spread (provided that he does not attempt to
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"leg" out of the spread). The disadvantage of using the long-term call in the calendar
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spread is that the initial debit is larger, and therefore more dollars are initially at risk. |