38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
98 Part II: Call Option Strategies
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When risk is considered, the in-the-money call clearly has less probability of
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risk. In the prior example, the in-the-money call buyer would not lose his entire
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investment unless XYZ fell by at least 5 points. However, the buyer of the out-of-the
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money July 70 would lose all of his investment unless the stock advanced by more
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than 5 points by expiration. Obviously, the probability that the in-the-money call will
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expire worthless is much smaller than that for the out-of-the-money call.
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The time remaining to expiration is also relevant to the call buyer. If the stock
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is fairly close to the striking price, the near-term call will most closely follow the price
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movement of the underlying stock, so it has the greatest rewards and also the great
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est risks. The far-term call, because it has a large amount of time remaining, offers
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the least risk and least percentage reward. The intermediate-temi call offers a mod
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erate amount of each, and is therefore often the most attractive one to buy. Many
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times an investor will buy the longer-term call because it only costs a point or a point
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and a half more than the intermediate-term call. He feels that the extra price is a bar
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gain to pay for three extra months of time. This line of thought may prove somewhat
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misleading, however, because most call buyers don't hold calls for more than 60 or 90
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days. Thus, even though it looks attractive to pay the extra point for the long-term
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call, it may prove to be an unnecessary expense if, as is usually the case, one will be
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selling the call in two or three months.
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CERTAINTY OF TIMING
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The certainty with which one expects the underlying stock to advance may also help
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to play a part in his selection of which call to buy. If one is fairly sure that the under
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lying stock is about to rise immediately, he should strive for more reward and not be
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as concerned about risk. This would mean buying short-term, slightly out-of-the
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money calls. Of course, this is only a general rule; one would not normally buy an out
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of-the-money call that has only one week remaining until expiration, in any case. At
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the opposite end of the spectrum, if one is very uncertain about his timing, he should
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buy the longest-term call, to moderate his risk in case his timing is wrong by a wide
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margin. This situation could easily result, for example, if one feels that a positive fun
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damental aspect concerning the company will assert itself and cause the stock to
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increase in price at an unknown time in the future. Since the buyer does not know
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whether this positive fundamental will come to light in the next month or six months
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from now, he should buy the longer-term call to allow room for error in timing.
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In many cases, one is not intending to hold the purchased call for any signifi
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cant period of time; he is just looking to capitalize on a quick, short-term movement
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by the underlying stock. In this case, he would want to buy a relatively short-term in
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the-money call. Although such a call may be more ex-pensive than an out-of-the- |