36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
78 Part II: Call Option Strategies
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UTILIZING DIFFERENT EXPIRATION SERIES WHEN ROLLING DOWN
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In the examples thus far, the same expiration month has been used whenever rolling
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down action was taken. In actual practice, the writer may often want to use a more
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distant expiration month when rolling down and, in some cases, he may even want to
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use a nearer expiration month.
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The advantage of rolling down into a more distant expiration series is that more
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actual points of protection are received. This is a common action to take when the
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underlying stock has become somewhat worrisome on a technical or fundamental
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basis. However, since rolling down reduces the maximum profit potential - a fact that
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has been demonstrated several times - every roll-down should not be made to a more
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distant expiration series. By utilizing a longer-term call when rolling down, one is
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reducing his maximum profit potential for a longer period of time. Thus, the longer
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term·call should be used only if the writer has grown concerned over the stock's capa
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bility to hold current price levels. The partial roll-down strategy is particularly
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amenable to rolling down to a longer-term call since, by rolling down only part of the
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position, one has already left the door open for profits if the stock should rebound.
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Therefore, he can feel free to avail himself of the maximum protection possible in the
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part of his position that is rolled down.
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The writer who must roll down to lock in a loss, possibly because of circum
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stances beyond his control, such as a sudden fall in the price of the underlying stock,
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may actually want to roll down to a near-term option. This allows him to make back
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the available time premium in the short-term call in the least time possible.
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Example: A writer buys XYZ at 19 and sells a 6-month call for 2 points. Shortly there
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after, however, bad news appears concerning the common stock and XYZ falls quick
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ly to 14. At that time, the following prices exist for the calls with the striking price 15:
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XYZ common, 14:
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near-term call, l;
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middle-term call, 1 ½; and
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far-term call, 2.
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If the writer rolls down into any of these three calls, he will be locking in a loss.
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Therefore, the best strategy may be to roll down into the near-term call, planning to
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capture one point of time premium in 3 months. In this way, he will be beginning to
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work himself out of the loss situation by availing himself of the most potential time
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premium decay in the shortest period of time. When the near-term call expires
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3 months from now, he can reassess the situation to decide if he wants to write |