49 lines
2.4 KiB
Plaintext
49 lines
2.4 KiB
Plaintext
Gapter 16: Put Option Buying 265
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points. For example, if XYZ is at 46 at expiration, the put will be worth 4 and the call
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worth l; or if XYZ is at 48, the put will be worth 2 and the call worth 3. If the stock
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is above 50 or below 45 at expiration, the combination will be worth more than 5
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points. Thus, the trader has no risk in this combination, since he has paid 5 points for
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it and will be able to sell it for at least 5 points at expiration. In fact, if the underly
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ing stock continues to drop, the put will become more valuable and he could build
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up substantial profits. Moreover, if the underlying stock should reverse direction and
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climb substantially, he could still profit, because the call will then become valuable.
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This tactic is the best one to use if the underlying stock does not stabilize near 45,
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but instead makes a relatively dramatic move either up or down by expiration. The
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strategy of simultaneously owning both a put and a call is discussed in much greater
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detail in Chapter 23. It is introduced here merely for the purposes of the put buyer
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wanting to obtain protection of his unrealized profits.
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Each of these five strategies may work out to be the best one under a different
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set of circumstances. The ultimate result of each tactic is dependent on the direction
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that XYZ moves in the future. As was the case with call options, the spread tactic
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never turns out to be the worst tactic, although it is the best one only if the underly
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ing stock stabilizes. Tables 16-4 and 16-5 summarize the results the speculator could
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expect from invoking each of these five tactics. The tactics are:
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1. Liquidate - sell the long put for a profit and do not reinvest.
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2. Do nothing - continue to hold the long put.
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3. "Roll down" - sell the long put, pocket the initial investment, and invest the
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remaining proceeds in out-of-the-money puts at a lower strike.
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4. "Spread" - create a spread by selling the out-of-the-money put against the put
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already held.
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5. "Combine" create a combination by buying a call at a lower strike while con
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tinuing to hold the put.
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TABLE 16-4.
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Comparison of the five tactics.
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By expiration, if XYZ ...
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Continues to fall dramatically
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Falls moderately further
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Remains relatively unchanged
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Rises moderately
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Rises substantially
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the best strategy was ...
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"Roll down"
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Do nothing
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Spread
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Liquidate
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Combine
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and the worst
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strategy was ...
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Liquidate
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Combine
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Combine or "roll down"
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"Roll down" or do nothing
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Do nothing |