53 lines
1.4 KiB
Plaintext
53 lines
1.4 KiB
Plaintext
26 • The Intelligent Option Investor
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5/18/2012
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5/20/2013 249 499
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Date/Day Count
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Stock Price
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749 999
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ESP = $45
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GREEN
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When a short seller sells a stock, he or she gets immediate profit exposure
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to the stock’s downside potential. The seller is selling at $50 and hopes to make
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a profit by buying the shares back later at a lower price—let’s say $35. When we
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get profit exposure to a stock’s downside potential using options, we are getting
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the same exposure as if we sold the stock at $50, except that we do not have to
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worry about losing our shirts if the stock moves up instead of down. In order to
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get this peace of mind, though, we must spend $5 in premium. This means that
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if we hold the position to expiration, we will only realize a net profit if the stock
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is trading at the $50 mark less the money we have already paid to buy that ex-
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posure—$5 in this case. As such, we are effectively selling the stock short at $45.
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There are some option strategies that end up not looking like one of
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the two stock positions—the flexibility of options allows an investor to do
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things a stock investor cannot. For example, here is the graphic representa-
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tion of a strategy commonly called a long strangle:
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5/18/2012
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5/20/2013 249 499
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Date/Day Count
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Stock Price
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749 999
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BE 1 = $80.75
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BE 2 = $19.25
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GREEN
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GREEN |