39 lines
1.8 KiB
Plaintext
39 lines
1.8 KiB
Plaintext
232 Part II: Call Option Strategies
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Figure 13-1 •
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Calendar spread sale at near-term expiration.
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$400
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$300
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Implied Volatility
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Lower
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$200 \
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f/)
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$100 f/)
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0
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~
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$0 50 60 110 120
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a. -$100
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-$200
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-$300
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Implied Volatility
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-$400 Remains High
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-$500
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Underlying Price
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allowed to stand because none of the member firms cared about changing it. Still, if
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one has excess collateral - perhaps from a large stock portfolio - and is interested in
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generating excess income in a hedged manner, then the strategy might be applicable
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for him as well. Futures option traders receive more favorable margin requirements,
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and it thus might be a more economical strategy for them.
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REVERSE RATIO SPREAD (BACKSPREAD)
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A more popular reverse strategy is the reverse ratio call spread, which is comrrwnly
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known as a backspread. In this type of spread, one would sell a call at one striking
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price and then would buy several calls at a higher striking price. This is exactly the
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opposite of the ratio spread described in Chapter 11. Some traders refer to any
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spread with unlimited profit potential on at least one side as a backspread. Thus, in
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most backspreading strategies, the spreader wants the stock to rrwve dramatically. He
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does not generally care whether it moves up or down. Recall that in the reverse
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hedge strategy (similar to a straddle buy) described in Chapter 4, the strategist had
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the potential for large profits if the stock moved either up or down by a great deal.
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In the backspread strategy discussed here, large potential profits exist if the stock
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moves up dramatically, but there is limited profit potential to the downside.
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Example: XYZ is selling for 43 and the July 40 call is at 4, with the July 45 call at l.
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A reverse ratio spread would be established as follows: · |