36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
108 Part II: Call Option Strategies
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reluctant to sell a call at 2 that he had previously bought for 1 point, because "I've
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only made a point." The similarity is clear - both cases resulted in approximately a
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100% profit - and the investor should be as willing to accept the one as he is the
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other. This is not to imply that all calls that are bought at 1 should be sold when and
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if they get to 2, but the same factors that induce one to sell the 10-point call after
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doubling his money should apply to the 2-point call as well.
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In fact, taking partial profits after a call holding has increased in value is often
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a wise plan. For example, if someone bought a number of calls at a price of 3, and
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they later were worth 5, it might behoove the call holder to sell one-third to one-half
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of his position at 5, thereby taking a partial profit. Having done that, it is often easi
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er to let the profits run on the balance, and letting profits run is generally one of the
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keys to successful trading.
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It is rarely to the call buyer's benefit to exercise the call if he has to pay com
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missions. When one exercises a call, he pays a stock commission to buy the stock at
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the striking price. Then when the stock is sold, a stock sale commission must also be
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paid. Since option commissions are much smaller, dollarwise, than stock commis
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sions, the call holder will usually realize more net dollars by selling the call in the
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option market than by exercising it.
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LOCKING IN PROFITS
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When the call buyer is fortunate enough to see the underlying stock advance rela
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tively quickly, he can implement a number of strategies to enhance his position.
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These strategies are often useful to the call buyer who has an unrealized profit but is
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torn between taking the profit or holding on in an attempt to generate more profits
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if the underlying stock should continue to rise.
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Example: A call buyer bought an XYZ October 50 call for 3 points when the stock
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was at 48. Then the stock rises to 58. The buyer might consider selling his October
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50 (which would probably be worth about 9 points) or possibly taking one of several
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actions, some of which might involve the October 60 call, which may be selling for 3
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points. Table 3-1 summarizes the situation. At this point, the call buyer might take
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one of four basic actions:
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1. Liquidate the position by selling the long call for a profit.
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2. Sell the October 50 that he is currently long and use part of the proceeds to pur
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chase October 60's.
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3. Create a spread by selling the October 60 call against his long October 50.
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4. Do nothing and remain long the October 50 call. |