36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
250 Part Ill: Put Option Strategies
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Example: XYZ is selling for $25 per share and will pay $1 in dividends over the next
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6 months. Then a 6-month put option with strike 25 should automatically be worth
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at least $1, regardless of any other factor concerning the underlying stock. During the
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next 6 months, the stock will be reduced in price by the amount of its dividends- $1
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- and if everything else remained the same, the stock would then be at 24. With the
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stock at 24, the put would be 1 point in-the-money and would thus be worth at least
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its intrinsic value of 1 point. Thus, in advance, this large dividend payout of the
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underlying stock will help to increase the price of the put options on this stock.
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On the day before a stock goes ex-dividend, the time value premium of an in
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the-money put should be at least as large as the impending cash dividend payment.
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That is, if XYZ is 40 and is about to pay a $.50 dividend, an XYZ January 50 put should
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sell for at least l 0½. This is true because the stock will be reduced in price by the
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amount of its dividend on the day of the ex-dividend.
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EXERCISE AND ASSIGNMENT
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When the holder of a put option exercises his option, he sells stock at the striking
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price. He may exercise this right at any time during the life of the put option. When
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this happens, the writer of a put option with the same terms is assigned an obligation
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to buy stock at the striking price. It is important to notice the difference between
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puts and calls in this case. The call holder exercises to buy stock and the call writer is
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obligated to sell stock. The reverse is true for the put holder and writer.
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The methods of assignment via the OCC and the brokerage firm are the same
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for puts and calls; any fair method of random or first-in/first-out assignment is
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allowed. Stock commissions are charged on both the purchase and sale of the stock
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via the assignment and exercise.
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When the holder of a put option exercises his right to sell stock, he may be sell
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ing stock that he currently holds in his portfolio. Second, he may simultaneously go
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into the open market and buy stock for sale via the put exercise. Finally, he may want
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to sell the stock in his short stock account; that is, he may short the underlying stock
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by exercising his put option. He would have to be able to borrow stock and supply
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the margin collateral for a short sale of stock if he chose this third course of action.
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The writer of the put option also has several choices in how he wants to handle
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the stock purchase that he is required to make. The put writer who is assigned must
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receive stock. (The call writer who is assigned delivers stock.) The put writer may cur
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rently be short the underlying stock, in which case he will merely use the receipt of
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stock from the assignment to cover his short sale. He may also decide to immediate- |