25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
Chpter 3: Call Buying 117
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not rally by October, he has decreased his overall loss by the amount received for the
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sale of the July 35 call.
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This strategy is not as attractive to use as the previous one. If XYZ should rally
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before July expiration, the investor might find himself with two losing positions. For
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example, suppose that XYZ rallied back to 36 in the next week. His short call that he
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sold for 1 point would be selling for something more than that, so he would have an
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unrealized loss on the short July 35. In addition, the October 35 would probably not
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have appreciated back to its original price of 3, and he would therefore have an unre
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alized loss on that side of the spread as well.
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Consequently, this strategy should be used with great caution, for if the under
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lying stock rallies quickly before the near-term expiration, the spread could be at a
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loss on both sides. Note that in the former spread strategy, this could not happen.
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Even if XYZ rallied quickly, some profit would be made on the rebound.
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A FURTHER COMMENT ON SPREADS
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Anyone not familiar with the margin requirements for spreads, under both the
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exchange margin rules and the rules of the brokerage firm he is dealing with, should
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not attempt to utilize a spread transaction. Later chapters on spreads outline the
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more common requirements for spread transactions. In general, one must have a
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margin account to establish a spread and must have a minimum amount of equity in
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the account. Thus, the call buyer who operates in a cash account cannot necessarily
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use these spread strategies. To do so might incur a margin call and possible restric
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tion of one's trading account. Therefore, check on specific requirements before uti
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lizing a spread strategy. Do not assume that a long call can automatically be "rolled"
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into any sort of spread. |