37 lines
1.8 KiB
Plaintext
37 lines
1.8 KiB
Plaintext
404 Part Ill: Put Option Strategies
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Example: The following prices exist in the month of January:
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XYZ: 105
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April 100 call: 10 1/2
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April 110 call: 5 1/2
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January (2-year) 100 call: 26
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January (2-year) 110 call: 21 1/2
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An investor is considering a bull spread in XYZ and is unsure about whether to use
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the short-term calls, the LEAPS calls, or a mixture. These are his choices:
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Short-term bull spread:
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Diagonal bull spread:
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LEAPS bull spread:
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Buy April 100@ 101/2
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Sell April 110@ 51/2
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Net Debit: $500
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Buy January LEAPS 100 @ 26
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Sell April 110@ 51/2
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Net Debit: $2,050
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Buy January LEAPS 1 00 @ 26
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Sell January LEAPS 110@ 21 1/2
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Net Debit: $450
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Notice that the debit paid for the LEAPS spread is slightly less than that of the short
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term bull spread. This means that they have approximately the same profit potential
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at their respective expiration dates. However, the strategist is more concerned with
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how these compare directly with each other. The obvious point in time to make this
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comparison is when the short-term options expire.
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Figure 25-7 shows the profitability of these three positions at April expiration.
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It was assumed that all of the following were the same in April as they had been in
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January: volatility, short-term rates, and dividend payout.
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Note that the short-term bull spread has the familiar profit graph from Chapter
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7, making its maximum profit over 110 and taking its maximum loss below 100. (See
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Table 25-4.)
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The LEAPS spread doesn't generate much of either a profit or a loss in only
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three months' time. Even if XYZ rises to 120, the LEAPS bull spread will have only
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a $150 profit. Conversely, if XYZ falls to 80, the spread loses only about $200. This
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price action is very typical for long-term bull spreads when both options have a sig
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nificant amount of time premium remaining in them. |