25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
CHAPTER 20
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The Sale of a Straddle
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Selling a straddle involves selling both a put and a call with the same terms. As with
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any type of option sale, the straddle sale may be either covered or uncovered. Both
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uses are fairly common. The covered sale of a straddle is very similar to the covered
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call writing strategy and would generally appeal to the same type of investor. The
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uncovered straddle write is more similar to ratio call writing, and is attractive to the
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more aggressive strategist who is interested in selling large amounts of time premi
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um in hopes of collecting larger profits if the underlying stock remains fairly stable.
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THE COVERED STRADDLE WRITE
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In this strategy, one owns the underlying stock and simultaneously writes a straddle
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on that stock. This may be particularly appealing to investors who are already
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involved in covered call writing. In reality, this position is not totally covered - only
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the sale of the call is covered by the ownership of the stock. The sale of the put is
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uncovered. However, the name "covered straddle" is generally used for this type of
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position in order to distinguish it from the uncovered straddle write.
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Example: XYZ is at 51 and an XYZ January 50 call is selling for 5 points while an XYZ
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January 50 put is selling for 4 points. A covered straddle write would be established
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by buying 100 shares of the underlying stock and simultaneously selling one put and
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one call. The similarity between this position and a covered call writer's position
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should be obvious. The covered straddle write is actually a covered write - long 100
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shares of XYZ plus short one call - coupled with a naked put write. Since the naked
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put write has already been shown to be equivalent to a covered call write, this posi
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tion is quite similar to a 200-share covered call write. In fact, all the profit and loss
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