37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Chapter 6: Ratio Call Writing 169
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All spreads fall into three broad categories: vertical, horizontal, or diagonal. A
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vertical spread is one in which the calls involved have the same expiration date but
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different striking prices. An example might be to buy the XYZ October 30 and sell
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the October 35 simultaneously. A horizontal spread is one in which the calls have the
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same striking price but different expiration dates. This is a horizontal spread: Sell the
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XYZ January 35 and buy the XYZ April 35. A diagonal spread is any combination of
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vertical and horizontal and may involve calls that have different expiration dates as
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well as different striking prices. These three names that classify the spreads can be
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related to the way option prices are listed in any newspaper summary of closing
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option prices. A vertical spread involves two options from the same column in a news
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paper listing. Newspaper columns run vertically. A horizontal spread involves two
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calls whose prices are listed in the same row in a newspaper listing; rows are hori
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zontal. This relationship to the listing format in newspapers is not important, but it is
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an easy way to remember what vertical spreads and horizontal spreads are. There are
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many types of vertical and horizontal spreads, and several of them are discussed in
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detail in later chapters.
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SPREAD ORDER
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The term "spread" designates not only a type of strategy, but a type of order as well.
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All spread transactions in which both sides of the spread are opening (initial) trans
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actions must be done in a margin account. This means that the customer must gen
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erally maintain a minimum equity in the account, normally $2,000. Some brokerage
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houses may also have a maintenance requirement, or "kicker."
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It is possible to transact a spread in a cash account, but one of the sides must be
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a closing transaction. In fact, many of the follow-up actions taken in the covered writ
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ing strategy are actually spread transactions. Suppose a covered writer is currently
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short one XYZ April call against 100 shares of the underlying stock. If he wants to roll
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forward to the July 35 call, he will be buying back the April 35 and selling the July 35
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simultaneously. This is a spread transaction, technically, since one call is being bought
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and the other is being sold. However, in this transaction, the buy side is a closing
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transaction and the sell side is an opening transaction. This type of spread could be
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done in a cash account. Whenever a covered writer is rolling - up, down, or fmward
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he should place the order as a spread order to facilitate a better price execution.
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The spreads discussed in the following chapters are predominantly spread
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strategies, ones in which both sides of the spread are opening transactions. These are
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designed to have their own profit and risk potentials, and are not merely follow-up
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actions to some previously discussed strategy. |