31 lines
1.8 KiB
Plaintext
31 lines
1.8 KiB
Plaintext
20 • The Intelligent Option Investor
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Any time a gain of exposure overlaps another gain of exposure,
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the potential gain from an investment if the stock price moves into that
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region rises. We will not represent this in the diagrams of this book,
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but you can think of overlapping gains as deeper and deeper shades of
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green (when gaining exposure) and deeper and deeper shades of red
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(when accepting it).
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Now that you understand how to graphically represent gaining and
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accepting exposure to both upside and downside directionality and how to
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represent situations when opposing exposures overlap, we can move onto
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the next section, which introduces the great flexibility options grant to an
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investor and discusses how that flexibility can be used as a force of either
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good or evil.
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Flexibility
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Again, the main takeaway of this section should be obvious from the title.
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Here we will see the only two choices stock investors have with regard to
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risk and return, and we will contrast that with the great flexibility an option
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investor has. We will also discuss the concept of an effective buy price and
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an effective sell price—two bits of intelligent option investor jargon. Last,
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we will look at a typical option strategy that might be recommended by
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an option “guru” and note that these types of strategies actually are at
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cross-purposes with the directional nature of options that makes them so
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powerful in the first place.
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Jargon introduced in this chapter is as follows:
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Effective buy price (EBP) Covered call
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Effective sell price (ESP) Long strangle
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Leg
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Stocks Give Investors Few Choices
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A stock investor only has two choices when it comes to investing: going
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long or going short. Using our visualization technique, those two choices
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look like this: |