38 lines
1.9 KiB
Plaintext
38 lines
1.9 KiB
Plaintext
328
|
||
FIGURE 21-2.
|
||
Bearishly split strikes.
|
||
C
|
||
0
|
||
e ·15.
|
||
X
|
||
w
|
||
Part Ill: Put Option Strategies
|
||
1u +$100
|
||
w $0 I-----------'------ ................. -----
|
||
~ 60
|
||
....J
|
||
0
|
||
~ a.
|
||
Stock Price at Expiration
|
||
essentially lets him own the put for free. In fact, he can still make profits even if the
|
||
underlying stock rises slightly or only falls slightly. His risk is realized if the stock rises
|
||
above the striking price of the written call.
|
||
This strategy of splitting the strikes in a bearish manner is used very frequently
|
||
in conjunction with the ownership of common stock. That is, a stock owner who is
|
||
looking to protect his stock will buy an out-of-the-money put and sell an out-of-the
|
||
money call to finance the put purchase. This strategy is called a "protective collar"
|
||
and was discussed in more detail in the chapter on Put Buying in Conjunction with
|
||
Common Stock Ownership. A strategy that is similar to these, but modifies the risk,
|
||
is presented in Chapter 23, Spreads Combining Calls and Puts.
|
||
SUMMARY
|
||
In either of these aggressive strategies, the investor must have a definite opinion
|
||
about the future price movement of the underlying stock. He buys an out-of-the
|
||
money option to provide profit potential for that stock movement. However, an
|
||
investor can lose the entire purchase proceeds of an out-of-the-money option if the
|
||
stock does not perform as expected. An aggressive investor, who has sufficient collat
|
||
eral, might attempt to counteract this effect by also writing an out-of-the-money
|
||
option to cover the cost of the option that he bought. Then, he will not only make
|
||
money if the stock performs as expected, but he will also make money if the stock
|
||
remains relatively unchanged. He will lose quite heavily, however, if the underlying
|
||
stock goes in the opposite direction from his original anticipation. That is why he
|
||
must have a definite opinion on the stock and also be fairly certain of his timing. |