34 lines
1.8 KiB
Plaintext
34 lines
1.8 KiB
Plaintext
224 • The Intelligent Option Investor
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For instance, here are data from ATM and OTM call options on IBM
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(IBM) expiring in 80 days. I took these data when IBM’s shares were trad-
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ing at $196.80 per share.
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Sell a Call at 195
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Cover at ($) Net Premium Received ($) Percent Return Capital at Risk ($)
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200 2.40 48 5
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205 4.26 43 10
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210 5.47 36 15
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215 6.17 31 20
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220 6.51 26 25
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225 6.70 22 30
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230 6.91 20 35
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235 6.90 17 40
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240 6.96 15 45
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In this table, net premium received was calculated by selling at the $195
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strike’s bid price and buying at each of the listed strike price’s ask prices. Percent
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return is the proportion of net premium received as a percentage of the capital
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at risk—the width of the spread. This table clearly shows that accepting expo-
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sure with a call spread is a levered strategy. The potential return on a percent-
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age basis can be raised simply by lowering the amount of capital at risk.
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However, although accepting exposure with a call spread is un-
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deniably levered from this perspective, there is one large difference: un-
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like the leverage discussed earlier in this book for a purchase of call op-
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tions—in which your returns were potentially unlimited—the short-call
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spread investor receives premium up front that represents the maximum
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return possible on the investment. As such, in the sense of the investor’s
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potential gains being limited, the short-call spread position appears to be
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an unlevered investment.
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Considering the dual nature of a short-call spread, it is most help-
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ful to think about managing these positions using a two-step process with
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both tactical and strategic aspects. We will investigate the tactical aspect
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of leverage in the remainder of this section and the strategic aspect in the
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portfolio management section. |