35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
O.,ter 16: Put Option Buying 261
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changes even on a fractional move in the underlying stock, but one generally assumes
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that it will hold true for a 1-point move. Obviously, put options have deltas as well. The
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delta of a put is a negative number, reflecting the fact that the put price and the stock
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price are inversely related. As an approximation, one could say that the delta of the
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ctill option minus the delta of the put option with the same terms is equal to 1. That is,
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Delta of put = Delta of call - 1.
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This is an approximation and is accurate unless the put is deeply in-the-money. It has
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already been pointed out that the time value premium behavior of puts and calls is
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different, so it is inaccurate to assume that this formula holds true exactly for all
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cases.
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The delta of a put ranges between O and minus 1. If a July 50 put has a delta of
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-½, and the underlying stock rises by 1 point, the put will lose ½ point. The delta of
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a deeply out-of-the-money put is close to zero. The put's delta would decrease slow
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ly at first as the stock declined in value, then would begin to decrease much more
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rapidly as the stock fell through the striking price, and would reach a value of minus
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1 (the minimum) as the stock fell only moderately below the striking price. This is
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reflective of the fact that an out-of-the-money put tends to hold time premium quite
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well and an in-the-money put comes to parity rather quickly.
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RANKING PROSPECTIVE PUT PURCHASES
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In Chapter 3, a method of ranking prospective call purchases was developed that
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encompassed certain factors, such as the volatility of the underlying stock and the
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expected holding period of the purchased option. The same sort of analysis should be
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applied to put option purchases.
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The steps are summarized below. The reader may refer to the section titled
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"Advanced Selection Criteria" in Chapter 3 for a more detailed description of why
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this method of ranking is superior.
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1. Assume that each underlying stock can decrease in price in accordance with its
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volatility over a fixed holding period (30, 60, or 90 days).
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2. Estimate the put option prices after the decrease.
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3. Rank all potential put purchases by the highest reward opportunity for aggressive
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purchases.
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4. Estimate how much would be lost if the underlying stock instead rose in accor
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dance with its volatility, and rank all potential put purchases by best risk/reward
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ratio for a more conservative list of put purchases. |