35 lines
1.9 KiB
Plaintext
35 lines
1.9 KiB
Plaintext
Chapter 11: Ratio Call Spreads 211
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The maximum profit at expiration for a ratio spread occurs if the stock is exact
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ly at the striking price of the written options. This is true for nearly all types of strate
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gies involving written options. In the example, if XYZ were at 45 at April expiration,
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the April 45 calls would expire worthless for a gain of $600 on the two of them, and
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the April 40 call would be worth 5 points, resulting in no gain or loss on that call.
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Thus, the total profit would be $600 less commissions.
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The greatest risk in a ratio call spread lies to the upside, where the loss may the
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oretically be unlimited. The upside break-even point in this example is 51, as shown
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in Table 11-1. The table and Figure 11-1 illustrate the statements made in the pre
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ceding paragraphs.
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In a 2:1 ratio spread, two calls are sold for each one purchased. The maximum
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profit amount and the upside break-even point can easily be computed by using the
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following formulae:
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Points of maximum profit = Initial credit + Difference between strikes or
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= Difference between strikes - Initial debit
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Upside break-even point= Higher strike price+ Points of maximum profit
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In the preceding example, the initial credit was 1 point, so the points of maxi
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mum profit = 1 + 5 = 6, or $600. The upside break-even point is then 45 + 6, or 51.
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This agrees with the results determined earlier. Note that if the spread is established
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at a debit rather than a credit, the debit is subtracted from the striking price differ
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ential to determine the points of maximum profit.
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Many neutral investors prefer ratio spreads over ratio writes for two reasons:
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TABLE 11-1.
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Ratio call spread.
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XYZ Price of April 40 Coll April 45 Coll Total
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Expiration Profits Profits Profits
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35 -$ 500 +$ 600 +$100
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40 - 500 + 600 + 100
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42 - 300 + 600 + 300
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45 0 + 600 + 600
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48 + 300 0 + 300
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51 + 600 - 600 0
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55 +1,000 -1,400 - 400
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60 + 1,500 -2,400 - 900 |