26 lines
2.0 KiB
Plaintext
26 lines
2.0 KiB
Plaintext
320 Part Ill: Put Option Strategies
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An extension of this concept of trying to avoid too much follow-up action is that
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the strategist should not attempt to anticipate movement in an underlying stock. For
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example, if the straddle writer has planned to take defensive action should the stock
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reach 50, he should not anticipate by taking action with the stock at 48 or 49. It is
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possible that the stock could retreat back down; then the writer would have taken a
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defensive action that not only cost him commissions, but reduced his profit potential.
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Of course, there is a little trader in everyone, and the temptation to anticipate (or to
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wait too long) is always there. Unless there are very strong technical reasons for doing
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so, the strategist should resist the temptation to trade, and should operate his strate
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gy according to his original plan. The ratio writer may actually have an advantage in
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this respect, because he can use buy and sell stops on the underlying stock to remove
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the emotion from his follow-up strategy. This technique was described in Chapter 6
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on ratio call writing. Unfortunately, no such emotionless technique exists for the
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straddle or strangle writer.
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USING THE CREDITS
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In previous chapters, it was mentioned that the sale of uncovered options does not
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require any cash investment on the pait of the strategist. He may use the collateral
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value of his present portfolio to finance the sale of naked options. Moreover, once he
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sells the uncovered options, he can take the premium dollars that he has brought in
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from the sales to buy fixed-income securities, such as Treasury bills. The same state
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ments naturally apply to the straddle writing and strangle writing strategies. However,
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the strategist should not be overly obsessed with continuing to maintain a credit bal
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ance in his positions, nor should he strive to hold onto the Treasury bills at all costs. If
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one's follow-up actions dictate that he must take a debit to avoid losses or that he
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should sell out his Treasury bills to keep a credit, he should by all means do so. |