34 lines
2.7 KiB
Plaintext
34 lines
2.7 KiB
Plaintext
300 Part Ill: Put Option Strategies
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takes a nasty fall, and (2) collateral requirements are small, so it is possible to utilize
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a great deal of leverage. It may seem like a good idea to write out-of-the-money puts
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on "quality" stocks that you "wouldn't mind owning." However, any stock is subject
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to a crushing decline. In almost any year there are serious declines in one or more of
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the largest stocks in America (IBM in 1991, Procter and Gamble in 1999, and Xerox
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in 1999, just to name a few). If one happens to be short puts on such stocks - and
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worse yet, ifhe happens to have overextended himself because he had the initial mar
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gin required to sell a great deal of puts - then he could actually be wiped out on such
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a decline. Therefore, do not leverage your account heavily in the naked put strategy,
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regardless of the "quality" of the underlying stock.
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THE COVERED PUT SALE
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By definition, a put sale is covered only if the investor also owns a corresponding put
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with striking price equal to or greater than the strike of the written put. This is a
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spread. However,formargin purposes, one is covered ifhe sells a put and is also short
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the underlying stock. The margin required is strictly that for the short sale of the
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stock; there is none required for the short put. This creates a position with limited
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profit potential that is obtained if the underlying stock is anywhere below the strik
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ing price of the put at expiration. There is unlimited upside risk, since if the under
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lying stock rises, the short sale of stock will accrue losses, while the profit from the
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put sale is limited. This is really a position equivalent to a naked call write, except that
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the covered put writer must pay out the dividend on the underlying stock, if one
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exists. The naked sale of a call also has an advantage over this strategy in that com
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mission costs are considerably smaller. In addition, the time value premium of a call
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is generally higher than that of a put, so that the naked call writer is taking in more
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time premium. The covered put sale is a little-used strategy that appears to be infe
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rior to naked call writing. As a result, the strategy is not described more fully.
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RATIO PUT WRITING
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A ratio put write involves the short sale of the underlying stock plus the sale of 2 puts
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for each 100 shares sold short. This strategy has a profit graph exactly like that of a
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ratio call write, achieving its maximum profit at the striking price of the written
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options, and having large potential losses if the underlying stock should move too far
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in either direction. The ratio call write is a highly superior strategy, however, for the
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reasons just outlined. The ratio call writer receives dividends while the ratio put |