41 lines
1.2 KiB
Plaintext
41 lines
1.2 KiB
Plaintext
276 • The Intelligent Option Investor
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If someone wanted to make extra income by selling calls to accept expo-
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sure to the stock’s upside, what price would they likely charge for someone
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wanting to buy this call option?
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a. Almost nothing
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b. A little
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c. A good bit
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Obviously, the correct answer to the put option question is c. This option
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would be pretty expensive because its range of exposure overlaps with so
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much of the BSM cone. Conversely, the answer to the call option question
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is a. This option would be really cheap because its range of exposure is well
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above the BSM cone.
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Remember, though, that we have our crystal ball, and we know
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that this stock will likely be somewhere between $70 and $110 per share
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in a few years. With this confidence, wouldn’t it make sense to take the
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opposite side of both the preceding trades? Doing so would look like
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this:
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5/18/2012
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10
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20
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30
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40
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50
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60
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70
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80
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90
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100
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110
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120
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5/20/2013 249 499 749 999
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Date/Day Count
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Advanced Building Corp. (ABC)
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Stock Price
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Best Case, 110
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Worst Case, 70
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-
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GREEN
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RED
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In this investment, which I explain in detail in Chapter 11, we are
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receiving a good bit of money by selling an expensive put and paying |