35 lines
2.3 KiB
Plaintext
35 lines
2.3 KiB
Plaintext
350 Part Ill: Put Option Strategies
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quently than the case in which both the out-of-the-money put and call expire worth
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less in the previous strategy. Thus, the "calendar combination" strategy will afford the
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spreader more opportunities for large profits, and will also never force him to
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increase his risk.
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OWNING A ✓,,FREE" COMBINATION (THE ""DIAGONAL
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BUTTERFLY SPREAD")
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The strategies described in the previous sections are established for debits. This
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means that even if the near-term options expire worthless, the strategist still has risk.
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The long options he then holds could proceed to expire worthless as well, thereby
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leaving him with an overall loss equal to his original debit. There is another strategy
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involving both put and call options that gives the strategist the opportunity to own a
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"free" combination. That is, the profits from the near-term options could equal or
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exceed the entire cost of his long-term options.
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This strategy consists of selling a near-term straddle and simultaneously pur
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chasing both a longer-term, out-of the-money call and a longer-term, out-of the
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money put. This differs from the protected straddle write previously described in that
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the long options have a more distant maturity than do the short options.
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Example:
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XYZ common: 40
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April 35 put:
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January 40 straddle:
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April 45 call:
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If one were to sell the short-term January 40 straddle for 7 points and simultaneous
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ly purchase the out-of-the-money put and call combination -April 35 put and April
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45 call - he would establish a credit spread. The credit for the position is 3 points less
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commissions, since 7 points are brought in from the straddle sale and 4 points are
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paid for the out-of-the-money combination. Note that the position technically con
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sists of a bearish spread in the calls - buy the higher strike and sell the lower strike -
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coupled with a bullish spread in the puts - buy the lower strike and sell the higher
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strike. The investment required is in the form of collateral since both spreads are
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credit spreads, and is equal to the differential in the striking prices, less the net cred
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it received. In this example, then, the investment would be 10 points for the striking
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price differential (5 points for the calls and 5 points for the puts) less the 3-point
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credit received, for a total collateral requirement of $700, plus commissions. |