38 lines
3.1 KiB
Plaintext
38 lines
3.1 KiB
Plaintext
140 Part II: Call Option Strategies
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The writer should take great caution in ascertaining that the call does have some time
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premium in it. He does not want to receive an assignment notice on the written call.
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It is easiest to find time premium in the more distant expiration series, so the writer
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would normally be safest from assignment by writing the longest-term deep in-the
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money call if he wants to make a bearish trade in the stock.
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Example: An investor thinks that XYZ could fall 3 or 4 points from its current price
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of 60 in a quick downward move, and wants to capitalize on that move by writing a
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naked call. If the April 40 were the near-term call, he might have the choice of sell
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ing the April 40 at 20, the July 40 at 20¼, or the October 40 at 20½. Since all three
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calls will drop nearly point for point with the stock in a move to 56 or 57, he should
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write the October 40, as it has the least risk of being assigned. A trader utilizing this
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strategy should limit his losses in much the same way a short seller would, by cover
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ing if the stock rallies, perhaps breaking through overhead technical resistance.
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ROLLING FOR CREDITS
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Most writers of naked calls prefer to use one of the two strategies described above.
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The strategy of writing at-the-money calls, when the stock price is initially close to the
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striking price of the written call, is not widely utilized. This is because the writer who
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wants to limit risk will write an out-of-the-money call, whereas the writer who wants
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to make larger, quick trading profits will write an in-the-money call. There is, how
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ever, a strategy that is designed to utilize the at-the-money call. This strategy offers a
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high degree of eventual success, although there may be an accumulation of losses
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before the success point is reached. It is a strategy that requires large collateral back
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ing, and is therefore only for the largest investors. We call this strategy "rolling for
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credits." The strategy is described here in full, although it can, at times, resemble a
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Martingale strategy; that is, one that requires "doubling up" to succeed, and one that
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can produce ruin if certain physical limits are reached. The classic Martingale strat
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egy is this: Begin by betting one unit; if you lose, double your bet; if you win that bet,
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you'll have netted a profit of one unit (you lost one, but won two); if you lost the sec
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ond bet, double your bet again. No matter how many times you lose, keep doubling
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your bet each time. When you eventually win, you will profit by the amount of your
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original bet (one unit). Unfortunately, such a strategy cannot be employed in real life.
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For example, in a gambling casino, after enough losses, one would bump up against
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the table limit and would no longer be able to double his bet. Consequently, the strat
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egy would be ruined just when it was at its worst point. While "rolling for credits"
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doesn't exactly call for one to double the number of written calls each time, it does
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require that one keep increasing his risk exposure in order to profit by the amount of
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that original credit sold. In general, Martingale strategies should be avoided. |