32 lines
1.8 KiB
Plaintext
32 lines
1.8 KiB
Plaintext
188 • The Intelligent Option Investor
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such a way that such a loss of capital becomes just a cost of doing business
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that will be made up for in another investment down the line.
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For each of the strategies mentioned in this chapter, I present
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a stylized graphic representing the Black-Scholes-Merton model
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(BSM) cone and the option’s range of exposure plus best- and worst-
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case valuation scenarios. These are two of the required inputs for an
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intelligent option investing strategy—an intelligently determined valu-
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ation range and the mechanically determined BSM forecast range. I will
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also provide a summary of the relative pricing of upside and downside
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exposure vis-à-vis an intelligent valuation range (e.g., “Upside expo-
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sure is undervalued”), the steps taken to execute the strategy, and its
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potential risks and return.
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After this summary section, I provide textual discussions of tenor se-
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lection, strike price selection, portfolio management (i.e., rolling, exercise,
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etc.), and any miscellaneous items of interest to note. Understanding the
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strategies well and knowing how to use the tools at your disposal to tilt
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the balance of risk and reward in your favor are the hallmark and pinnacle
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of intelligent option investing. Intelligent option investors gain exposure
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when the market underestimates the likelihood of a valuation that the in-
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vestor believes is a rational outcome. In graphic terms, this means that ei-
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ther one or both of the investor’s best- and worst-case valuation scenarios
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lie outside the BSM cone.
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Simple (one-option) strategies to gain exposure include
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• Long calls
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• Long puts
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Complex (multioption) strategies to gain exposure include
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• Long strangles
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• Long straddles
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Jargon introduced in this chapter includes the following:
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Roll
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Ratio(ing) |