34 lines
2.6 KiB
Plaintext
34 lines
2.6 KiB
Plaintext
180 Part II: Call Option Strategies
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the overall increase in risk is small - the amount paid to repurchase the short call. If
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he attempts to "leg" out of the spread in such a manner, the spreader should not
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attempt to buy back the short call at too high a price. If it can be repurchased at 1/s
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or 1/16, the spreader will be giving away virtually nothing by buying back the short call.
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However, he should not be quick to repurchase it if it still has much more value than
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that, unless he is closing out the entire spread. At no time should one attempt to "leg"
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out after a stock price increase, taking the profit on the long side and hoping for a
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stock price decline to make the short side profitable as well. The risk is too great.
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Many traders find themselves in the somewhat perplexing situation of having
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seen the underlying make a large, quick move, only to find that their spread has not
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widened out much. They often try to figure out a way to perhaps lock in some gains
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in case the underlying subsequently drops in price, but they want to be able to wait
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around for the spread to widen out more toward its maximum profit potential. There
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really isn't any hedge that can accomplish all of these things. The only position that
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can lock in the profits in a call bull spread is to purchase the accompanying put bear
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spread. This strategy is discussed in Chapter 23, Spreads Combining Calls and Puts.
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OTHER USES OF BULL SPREADS
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Superficially, the bull spread is one of the simplest forms of spreading. However, it
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can be an extremely useful tool in a wide variety of situations. Two such situations
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were described in Chapter 3. If the outright purchaser of a call finds himself with an
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unrealized loss, he may be able to substantially improve his chances of getting out
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even by "rolling down" into a bull spread. If, however, he has an unrealized profit, he
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may be able to sell a call at the next higher strike, creating a bull spread, in an attempt
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to lock in some of his profit.
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In a somewhat similar manner, a common stockholder who is faced with an
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unrealized loss may be able to utilize a bull spread to lower the price at which he
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can break even. He may often have a significantly better chance of breaking even or
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making a profit by using options. The following example illustrates the stockholder's
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strategy.
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Example: An investor buys 100 shares of XYZ at 48, and later finds himself with an
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unrealized loss with the stock at 42. A 6-point rally in the stock would be necessary
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in order to break even. However, if XYZ has listed options trading, he may be able to
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significantly reduce his break-even price. The prices are: |