27 lines
1.4 KiB
Plaintext
27 lines
1.4 KiB
Plaintext
Chapter 13: Reverse Spreads
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FIGURE 13-2.
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Reverse ratio spread (backspread).
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C:
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~ +$200
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;%
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:!::
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e
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a. -$300
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Stock Price at Expiration
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235
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merely used a 2:1 ratio for convenience, instead of using the 2.3:l ratio. If anything,
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one might normally establish the spread with an extra bullish emphasis, since the
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largest profits are to the upside. There is little reason for the spreader to have too lit
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tle bullishness in this strategy. Thus, if the deltas are correct, the neutral ratio can aid
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the spreader in the determination of a more accurate initial ratio.
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The strategist must be alert to the possibility of early exercise in this type of
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spread, since he has sold a call that is in-the-money. Aside from watching for this pos
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sibility, there is little in the way of defensive follow-up action that needs to be imple
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mented, since the risk is limited by the nature of the position. He might take profits
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by closing the spread if the stock rallies before expiration.
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This strategy presents a reasonable method of attempting to capitalize on a
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large stock movement with little tie-up of collateral. Generally, the strategist would
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seek out volatile stocks for implementation of this strategy, because he would want as
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much potential movement as possible by the time the calls expire. In Chapter 14, it
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will be shown that this strategy can become more attractive by buying calls with a
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longer maturity than the calls sold. |