36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
260 Part Ill: Put Option Strategies
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buyer can often purchase a longer-term option for very little extra money, thus gain
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ing more time to work with. Call option buyers are generally forced to avoid the
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longer-term series because the extra cost is not worth the risk involved, especially in
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a trading situation. However, the put buyer does not necessarily have this disadvan
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tage. If he can purchase the longer-term put for nearly the same price as the near
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term put, he should do so in case the underlying stock takes longer to drop than he
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had originally anticipated it would.
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It is not uncommon to see such prices as the following:
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XYZ common, 46:
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XYZ April 50 put, 4;
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XYZ July 50 put, 4½; and
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XYZ October 50 put, 5.
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None of these three puts have much time value premium in their prices. Thus, the
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buyer might be willing to spend the extra 1 point and buy the longest-term put. If the
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underlying stock should drop in price immediately, he will profit, but not as much as
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if he had bought one of the less expensive puts. However, should the underlying stock
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rise in price, he will own the longest-term put and will therefore suffer less of a loss,
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percentagewise. If the underlying stock rises in price, some amount of time value
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premium will come back into the various puts, and the longest-term put will have the
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largest amount of time premium. For example, if the stock rises back to 50, the fol
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lowing prices might exist:
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XYZ common, 50;
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XYZ April 50 put, l;
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XYZ July 50 put, 2½; and
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XYZ October 50 put, 3½.
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The purchase of the longer-term October 50 put would have suffered the least loss,
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percentagewise, in this event. Consequently, when one is purchasing an in-the
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money put, he may often want to consider buying the longest-term put if the time
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value premium is small when compared to the time premium in the nearer-term
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puts.
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In Chapter 3, the delta of an option was described as the amount by which one
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might expect the option will increase or decrease in price if the underlying stock
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moves by a fixed amount (generally considered to be one point, for simplicity). Thus,
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if XYZ is at 49 and a call option is priced at 3 with a delta of ½, one would expect the
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call to sell for 3½ with XYZ at 50 and to sell at 2¼ with XYZ at 48. In reality, the delta |