38 lines
1.4 KiB
Plaintext
38 lines
1.4 KiB
Plaintext
Chapter 7: Bull Spreads
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FIGURE 7-2.
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Lowering the break-even price on common stock.
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C:
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0
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I +$200
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iii
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(/)
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$0 (/)
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.:l
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0
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i5
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e
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Q.
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-$800
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40
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Profit with Options
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,
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,,,' , ,
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,,,'
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50
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Stock Price at Expiration
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183
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;f ,,
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very similar to owning the stock. Since such a call costs less to purchase than the stock
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itself would, the buyer is getting essentially the same profit or loss potential with a
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smaller investment. It is natural, then, to think that one might write another call -
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one closer to the money- against the deeply in-the-money purchased call. This posi
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tion would have profit characteristics much like a covered write, since the long call
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"simulates" the purchase of stock This position really is, of course, a bull spread, in
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which the purchased call is well in-the-money and the written call is closer to the
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money. Clearly, one would not want to put all of his money into such a strategy and
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forsake covered writing, since, with bull spreads, he could be entirely wiped out in a
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moderate market decline. In a covered writing strategy, one still owns the stocks even
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after a severe market decline. However, one may achieve something of a compromise
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by investing a much smaller amount of money in bull spreads than he might have
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invested in covered writes. He can still retain the same profit potential. The balance
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of the investor's funds could then be placed in interest-bearing securities. |