35 lines
2.3 KiB
Plaintext
35 lines
2.3 KiB
Plaintext
364 Part Ill: Put Option Strategies
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the spread with puts that are too deeply in-the-money, for this reason. While being
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put will not necessarily change the profitability of the spread, it will mean increased
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commission costs and margin charges for the customer, who must buy the stock upon
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assignment.
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A LOGICAL EXTENSION (THE RATIO CALENDAR COMBINATION)
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The previous section demonstrated that ratio put calendar spreads can be attractive.
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The ratio call calendar spread was described earlier as a reasonably attractive strate
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gy for the bullish investor. A logical combination of these two types of ratio calendar
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spreads (put and call) would be the ratio combination - buying a longer-term out-of
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the-money combination and selling several near-term out-of-the-money combina
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tions.
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Example: The following prices exist:
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XYZ common: 55
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XYZ January 50 put:
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XYZ January 60 call:
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XYZ April 50 put: 2
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XYZ April 60 call: 5
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One could sell the near-term January combination (January 50 put and January 60
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call) for 5 points. It would cost 7 points to buy the longer-term April combination
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(April 50 put and April 60 call). By selling more January combinations than April com
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binations bought, a ratio calendar combination could be established. For example,
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suppose that a strategist sold two of the near-term January combinations, bringing in
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10 points, and simultaneously bought one April combination for 7 points. This would
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be a credit position, a credit of 3 points in this example. If the near-term, out-of-the
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money combination expires worthless, a guaranteed profit of 3 points will exist, even
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if the longer-term options proceed to expire totally worthless. If the near-term com
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bination expires worthless, the longer-term combination is owned for free, and a large
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profit could result on a substantial stock price movement in either direction.
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Although this is a superbly attractive strategy if the near-term options do, in
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fact, expire worthless, it must also be monitored closely so that large losses do not
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occur. These large losses would be possible if the stock broke out in either direction
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too quickly, before the near-term options expire. In the absence of a technical opin
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ion on the underlying stock, one can generally compute a stock price at which it
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might be reasonable to take follow-up action. This is a similar analysis to the one |