36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
382 Part Ill: Put Option Strategies
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whether the move is feasible at all, and if it is, whether to use the call substitution
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strategy or the put protection strategy.
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LEAPS INSTEAD OF SHORT STOCK
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Just as in-the-money LEAPS calls may sometimes be a smarter purchase than the
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stock itself, in-the-money puts may sometimes be a better purchase than shorting the
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common stock. Recall that either the put purchase or the short sale of stock is a bear
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ish strategy, generally implemented by someone who expects the stock to decline in
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price. The strategist knows, however, that short stock is a component of many strate
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gies and might reflect other opinions than pure bearishness on the common. In any
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case, an in-the-money put may prove to be a viable substitute for shorting the stock
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itself. The two main advantages that the put owner has are that he has limited risk
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(whereas the short seller of stock has theoretically unlimited risk); and he does not
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have to pay out any dividends on the underlying stock as the short seller would. Also,
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the commissions for buying the put would normally be smaller than those required
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to sell the stock short.
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There is not much in the way of calculating that needs to be done in order to
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make the comparison between buying the in-the-money put and shorting the stock.
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If the time value premium spent is small in comparison \vith the dividend payout that
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is saved, then the put is probably the better choice.
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Professional arbitrageurs and other exchange members, as well as some large
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customers, receive interest on their short sales. For these traders, the put would have
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to be trading with virtually no time premium at all in order for the comparison to
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favor the put purchase over the stock short sale. However, the public customer who
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is going to be shorting stock should be aware of the potential for buying an in-the
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money put instead.
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SPECULATIVE OPTION BUYING WITH LEAPS
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Strategists know that buying calls and puts can have various applications; witness the
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stock substitution strntegies above. However, the most popular reason for buying
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options is for speculative gain. The leverage inherent in owning options and their lim
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ited risk feature make them attractive for this purpose as well. The risk, of course,
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can be 100% of the investment, and time decay works against the option owner as
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well. LEAPS calls and puts fit all of these descriptions; they simply have longer matu
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rities.
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Time decay is the major enemy of the speculative option holder. Purchasing
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LEAPS options instead of the shorter-term equity options generally exposes the |