36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
206 Part II: Call Option Strategies
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strikes versus one bear spread with a IO-point difference between strikes, the risk has
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been balanced at both ends. When one uses strike prices that are not evenly spaced
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apart, his margin requirement increases substantially. In such a case, one has to mar
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gin the individual component spreads separately. Therefore, in this example, he
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would have to pay for the two bull spreads ( $200 each, for a total of $400) and then
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margin the additional call bear spread ($700: the $1,000 difference in the strikes, less
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the $300 credit taken in for that portion of the spread). Hence, in this example, the
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margin requirement would be $1,100, even though the risk is only $100. Technically,
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of that $1,100 requirement, the spread trader pays out only $100 in cash (the actual
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debit of the spread), and the rest of the requirement can be satisfied with excess
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equity in his account.
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The same analysis obviously applies whenever 5-point striking price intervals
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exist. There are numerous combinations that could be worked out for lower-priced
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stocks by merely skipping over a striking price ( using the 25's, 30's, and 40's, for exam
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ple). Although there are not normally many stocks trading over $100 per share, the
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same analysis is applicable using 130's, 140's, and 160's, for example.
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FOLLOW-UP ACTION
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Since the butterfly spread has limited risk by its construction, there is usually little
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that the spreader has to do in the way of follow-up action other than avoiding early
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exercise or possibly dosing out the position early to take profits or limit losses even
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further. The only part of the spread that is subject to assignment is the call at the mid
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dle strike. If this call trades at or near parity, in-the-money, the spread should be
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closed. This may happen before expiration if the underlying stock is about to go ex
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dividend. It should be noted that accepting assignment will not increase the risk of
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the spread (because any short calls assigned would still be protected by the remain
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ing long calls). However, the margin requirement would change substantially, since
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one would now have a synthetic put (long calls, short stock) in place. Plus, there may
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be more onerous commissions for trading stock. Therefore, it is usually wise to avoid
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assignment in a butterfly spread, or in any spread, for that matter.
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If the stock is near the middle strike after a reasonable amount of time has
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passed, an unrealized profit will begin to accrue to the spreader. If one feels that the
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underlying stock is about to move away from the middle striking price and thereby
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jeopardize these profits, it may be advantageous to close the spread to take the avail
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able profit. Be certain to include commission costs when determining if an unreal
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ized profit exists. As a general rule of thumb, if one is doing 10 spreads at a time, he |