35 lines
2.1 KiB
Plaintext
35 lines
2.1 KiB
Plaintext
18: Buying Puts in Conjundion with Call Purchases 283
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dle would be worth more than 5 points and the straddle buyer would make
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y, even though his put expired worthless. To the downside, a similar situation
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Mists. If XYZ were below 45 at expiration, the put would be worth more than 5
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points and he would have a profit despite the fact that the call expired worthless.
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Table 18-1 and Figure 18-1 depict the results of this example straddle purchase at
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expiration. The straddle buyer can immediately determine his break-even points at
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expiration - 45 and 55 in this example. He will lose money if the underlying stock is
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between those break-even points at expiration. He has potentially large profits if
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XYZ should move a great distance away from 50 by expiration.
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One would normally purchase a straddle on a relatively volatile stock that has
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the potential to move far enough to make the straddle profitable in the allotted time.
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This strategy is particularly attractive when option premiums are low, since low pre
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miums will mean a cheaper straddle cost. Although losses may occur in a relatively
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large percentage of cases that are held all the way until their expiration date, there is
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actually only a minute probability of losing one's entire investment. Even if XYZ
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should be at 50 at expiration, there would still be the opportunity to sell the straddle
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for a small amount on the final day of trading.
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TABLE 18-1.
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Results of straddle purchase at expiration.
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XYZ Price at Total Straddle
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Expiration Coll Profit Put Profit Profit
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30 -$ 300 +$1,800 + $1,500
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40 300 + 800 + 500
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45 300 + 300 0
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50 300 200 500
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55 + 200 200 0
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60 + 700 200 + 500
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70 + 1,700 200 + 1,500
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EQUIVALENCES
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Straddle buying is equivalent to the reverse hedge, a strategy described in Chapter 4
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in which one sells the underlying stock short and purchases two calls on the under
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lying stock. Both strategies have similar profit characteristics: a limited loss that
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would occur at the striking price of the options involved, and potentially large prof
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its if the underlying stock should rise or fall far enough in price. The straddle pur- |