23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
interest and dividends remain constant. Ultimately, the maximum loss will
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be 0.80, the premium paid, if there is no time value or carry considerations.
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The maximum profit is gained if Bed Bath & Beyond is at $57.50 at
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expiration. At this price, the February 57.50 call is worth the most it can be
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worth without having the January 57.50 call assigned and creating negative
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deltas to the upside. But how much precisely is the maximum profit?
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Richard would have to know what the February 57.50 call would be worth
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with Bed Bath & Beyond stock trading at $57.50 at February expiration
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before he can know the maximum profit potential. Although Richard can’t
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know for sure at what price the calls will be trading, he can use a pricing
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model to estimate the call’s value. Exhibit 11.2 shows analytics at January
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expiration.
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EXHIBIT 11.2 Bed Bath & Beyond January–February 57.50 call calendar
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greeks at January expiration.
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With an unchanged implied volatility of 23 percent, an interest rate of two
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percent, and no dividend payable before February expiration, the February
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57.50 calls would be valued at 1.53 at January expiration. In this best-case
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scenario, therefore, the spread would go from 0.80, where Richard
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purchased it, to 1.53, for a gain of 91 percent. At January expiration, with
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Bed Bath & Beyond at $57.50, the January call would expire; thus, the
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spread is composed of just the February 57.50 call.
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Let’s now go back in time and see how Richard figured this trade. Exhibit
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11.3 shows the position when the trade is established. |