22 lines
1.0 KiB
Plaintext
22 lines
1.0 KiB
Plaintext
Mixing Exposure • 235
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Collars are just a combination of the other two overlay strategies and so are
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easiest left to the end.
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Long Diagonal
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GREEN
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RED
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Downside: Overvalued
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Upside: Undervalued
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Execute: Sell an ATM put option (short put) and simultaneously
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buy an OTM call option (long call)
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Risk: Sum of put’s strike price and net premium paid for call
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Reward: Unlimited
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Margin: Amount equal to put’s strike price
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The Gist
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Other than the blank space in the middle of the diagram and the disparity
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between the lengths of the tenors, the preceding diagram looks very much like
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the risk-return profile diagram for a long stock—accepting downside exposure
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in return for gaining upside exposure. As you can see from the diagram, the
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range of exposure for the short put lies well within the Black-Scholes-Merton
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model (BSM) cone, but the range of exposure for the long call is well outside
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the cone. It is often possible to find short-put–long-call combinations that al-
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low for an immediate net credit when setting up this investment. |