36 lines
1.2 KiB
Plaintext
36 lines
1.2 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies 773
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very expensive options. If he buys them now and implied volatility returns to its
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median range near 50%, he will suffer from the decrease in implied volatility.
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As a possible remedy, he considers selling an out-of-the-money put credit
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spread at the same time that he buys the calls. The credit from this spread will act as
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a means of reducing the net cost of the calls. If he's right and the stock goes up, all
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will be well. However, the introduction of the put spread into the mix has introduced
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some additional downside risk.
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Suppose the following prices exist:
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XYZ: 100
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July 100 call: 10 (as stated above)
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July 90 put: 5
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July 80 put: 2
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The entire bullish position would now consist of the following:
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Buy 1 July 100 call at 1 0
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Buy 1 July 80 put at 2
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Sell 1 July 90 put at 5
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Net expenditure: 7 point debit (plus commission)
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Figure 37-6 shows the profitability, at expiration, of both the outright call pur
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chase and the bullish position constructed above.
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FIGURE 37-6.
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Profitability at expiration.
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2000
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Bullish Spread //
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/
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1000
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"' "' 0 ...J
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87 :!::
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Outright Call Purchase
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e 0
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C. 70 80 90
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<Ft 100 /100 ,,....... ___
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120
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-1000
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Stock
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-2000 |