37 lines
1.6 KiB
Plaintext
37 lines
1.6 KiB
Plaintext
226 • The Intelligent Option Investor
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of losing the entire margin amount is higher, but the margin amount lost
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is smaller. On the other hand, if we attempt to maximize our winnings
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and initiate the widest spread possible, our total exposure is greatest, even
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though the chance of losing all of it is lower.
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Plotting these three variables on a graph, here is what we get:
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200 (11%)
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0%
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20%
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40%
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60%
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80%
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106% 102%
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94%89%
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100%
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120%
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140%
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160%
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180%
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200%
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205 (22%) 210 (33%) 215 (44%) 220 (56%) 225 (67%) 230 (78%) 235 (89%) 240 (100%)
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Strike (% of Total Exposure)
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Risk & Return of Call Spreads vs. Maximum Spread
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Risk Comparison Return Comparison
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Here, on the horizontal axis, we have the value of the covering strike and
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the size of the corresponding spread as a percentage of the widest spread.
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This shows how much proportional capital is at risk (e.g., at the $215-strike,
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we are risking a total of $20 of margin; $20 is 44 percent of total exposure
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of $45 if we covered at the $240-strike level). The top line shows how much
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greater the loss would be if we used that strike to cover rather than the
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maximum strike and the option expired at that strike price (e.g., if we cover
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at the $215-strike and the option expires when the stock is trading at $215,
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our loss would be 6 percent greater than the loss we would suffer if we
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covered at the $240-strike). The bottom line shows the premium we will
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realize as income if the stock price declines as a percentage of the total pre-
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mium possible if we covered at the maximum strike price. Here are the val-
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ues from the graph in tabular format so that you can see the numbers used: |