37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Chapter 22: Basic Put Spreads 333
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above the higher strike. These are the same qualities that were displayed by a call bull
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spread (Chapter 7). The name "bull spread" is derived from the fact that this is a bull
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ish position: The strategist wants the underlying stock to rise in price.
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The risk is limited in this spread. If the underlying stock should decline by expi
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ration, the maximum loss will be realized with XYZ anywhere below 50 at that time.
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The risk is 5 points in this example. To see this, note that if XYZ were anywhere below
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50 at expiration, the differential between the two puts would widen to 10 points,
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since that is the difference between their striking prices. Thus, the spreader would
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have to pay 10 points to buy the spread back, or to close out the position. Since he
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initially took in a 5-point credit, this means his loss is equal to 5 points - the 10-point
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cost of closing out less the 5 points he received initially.
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The investment required for a bullish put spread is actually a collateral require
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ment, since the spread is a credit spread. The amount of collateral required is equal
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spread. In this example, the collateral requirement is $500- the $1,000, or 10-point,
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differential in the striking prices less the $500 credit received from the spread. Note
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that the maximum possible loss is always equal to the collateral requirement in a bull
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ish put spread.
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It is not difficult to calculate the break-even point in a bullish spread. ·In this
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example, the break-even point before commissions is 55 at expiration. With XYZ at
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55 in January, the January 50 put would expire worthless and the January 60 put
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would have to be bought back for 5 points. It would be 5 points in-the-money with
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XYZ at 55. Thus, the spreader would break even, since he originally received 5 points
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credit for the spread and would then pay out 5 points to close the spread. The fol
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lowing formulae allow one to quickly compute the details of a bullish put spread:
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Maximum potential risk = Initial collateral requirement
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= Difference in striking prices - Net credit received
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Maximum potential profit= Net credit
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Break-even price = Higher striking price - Net credit
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CALENDAR SPREAD
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In a calendar spread, a near-term option is sold and a longer-term option is bought,
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both with the same striking price. This definition applies to either a put or a call cal
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endar spread. In Chapter 9, it was shown that there were two philosophies available
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for call calendar spreads, either neutral or bullish. Similarly, there are two philoso
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phies available for put calendar spreads: neutral or bearish. |