37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
160 Part II: Call Option Strategies
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situation could arise to the downside. If:X'YZ were to plunge from 49 to 20, the ratio
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writer would make a good deal of profit from the calls by rolling down, but may still
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have a larger loss in the stock itself than the call profits can compensate for.
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Many ratio writers who are large enough to diversify their positions into a num
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ber of stocks will continue to maintain 2:1 ratios on all their positions and will simply
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close out a position that has gotten out of hand by running dramatically to the upside
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or to the downside. These traders believe that the chances of such a dramatic move
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occurring are small, and that they will take the infrequent losses in such cases in
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order to be basically neutral on the other stocks in their portfolios.
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There is, however, a way to combat this sort of dramatic move. This is done by
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altering the ratio of the covered write as the stock moves either up or down. For
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example, as the underlying stock moves up dramatically in price, the ratio writer can
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decrease the number of calls outstanding against his long stock each time he rolls.
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Eventually, the ratio might decrease as far as 1:1, which is nothing more than a cov
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ered writing situation. As long as the stock continues to move in the same upward
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direction, the ratio writer who is decreasing his ratio of calls outstanding will be giv
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ing more and more weight to the stock gains in the ratio write and less and less weight
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to the call losses. It is interesting to note that this decreasing ratio effect can also be
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produced by buying extra shares of stock at each new striking price as the stock
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moves up, and simultaneously keeping the number of outstanding calls written con
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stant. In either case, the ratio of calls outstanding to stock owned is reduced.
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When the stock moves down dramatically, a similar action can be taken to
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increase the number of calls written to stock owned. Normally, as the stock falls, one
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would sell out some of his long stock and roll the calls down. Eventually, after the
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stock falls far enough, he would be in a naked writing position. The idea is the same
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here: As the stock falls, more weight is given to the call profits and less weight is given
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to the stock losses that are accumulating.
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This sort of strategy is more oriented to extremely large investors or to firm
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traders, market-makers, and the like. Commissions will be exorbitant if frequent rolls
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are to be made, and only those investors who pay very small commissions or who have
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such a large holding that their commissions are quite small on a percentage basis will
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be able to profit substantially from such a strategy.
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ADJUSTING WITH THE DELTA
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The delta of the written calls can be used to determine the correct ratio to be used in
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this ratio-adjusting defensive strategy. The basic idea is to use the call's delta to
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remain as neutral as possible at all times. |