27 lines
1.4 KiB
Plaintext
27 lines
1.4 KiB
Plaintext
242 • The Intelligent Option Investor
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We accepted
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downside
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exposure when
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we sold this
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put, so have no
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exposure to the
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upside here.
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RED
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The top of the “Covered call” diagram is grayed out because we have
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sold away the upside exposure to the stock by selling the call option, and
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we are left only with the acceptance of the stock’s downside exposure. The
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pictures are slightly different, but the economic impact is the same.
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The other difference you will notice is that after the option expires, in the
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case of the covered call, we have represented the graphic as though there is some
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residual exposure. This is represented in this way because if the option expires
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ITM, you will have to deliver your stock to the counterparty who bought your
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call options. As such, your future exposure to the stock is contingent on another
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investor’s actions and the price movement of the stock. This is an important point
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to keep in mind, and I will discuss it more in the “Common Pitfalls” section.
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Execution
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Because this strategy is identical from a risk-reward perspective to short
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puts, the execution details should be the same as well. Indeed, covered
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calls should—like short puts—be executed ATM to get the most time value
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possible and preferably should be done on a stock that has had a recent fall
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and whose implied volatility has spiked. However, these theoretical points
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Short put |