33 lines
1.6 KiB
Plaintext
33 lines
1.6 KiB
Plaintext
130
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Example: The following prices exist:
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XYZ, 37½;
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XYZ July 40 call, 2; and
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XYZ July 35 call, 4.
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Part II: Call Option Strategies
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If one were to short 100 XYZ at 37½ and to buy one July 40 call for 2 and one July
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35 call for 4, he would have a position that is similar to a reverse hedge except that
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the maximum risk would be realized anywhere between 35 and 40 at expiration.
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Although this risk is over a much wider range than in the normal reverse hedge, it is
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now much smaller in dimension. Table 4-3 and Figure 4-3 show the results from this
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type of position at expiration. The maximum loss is 3½ points ($350), which is a
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smaller amount than could be realized using any ratio strictly with the July 35 or the
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July 40 call. However, this maximum loss is realizable over the entire range, 35 to 40.
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Again, large potential profits are available if the stock moves far enough either to the
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upside or to the downside.
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This form of the strategy should only be used when the stock is nearly centered
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between two strikes and the strategist wants a neutral positioning of the break-even
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points. Similar types of follow-up action to those described earlier can be applied to
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this form of the reverse hedge strategy as well.
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TABLE 4-3.
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Reverse hedge using two strikes.
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XYZ Price at Stock July 40 Coll July 35 Coll Total
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Expiration Profit Profit Profit Profit
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25 +$1,250 -$200 -$ 400 +$ 650
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30 + 750 - 200 400 + 150
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31 1/2 + 600 - 200 400 0
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35 + 250 - 200 400 350
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371/2 0 - 200 150 350
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40 - 250 - 200 + 100 350
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431/2 - 600 + 150 + 450 0
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45 - 750 + 300 + 600 + 150
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50 - 1,250 + 800 + 1,100 + 650 |