39 lines
3.0 KiB
Plaintext
39 lines
3.0 KiB
Plaintext
340 Part Ill: Put Option Strategies
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to look at it is this: The sale of the put spread reduces the call price down to a more
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moderate level, one that might be in line with its "theoretical value." In other words,
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the call would not be considered expensive if it were priced at 7 instead of 10. The sale
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of the put spread can be considered a way to reduce the overall cost of the call.
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Of course, the sale of the put spread brings some extra risk into the position
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because, if the stock were to fall dramatically, the put spread could lose 7 points ( the
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width of the strikes in the spread, 10 points, less the initial credit received, 3 points).
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This, added to the call's cost of 10 points, means that the entire risk here is 17 points.
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In fact, that is the margin required for this spread as well. Thus, the overall spread
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still has limited risk, because both the call purchase and the put credit spread are lim
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ited-risk strategies. However, the total risk of the two combined is larger than for
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either one separately.
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Remember that one must be bullish on the underlying in order to employ this
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strategy. So, if his analysis is correct, the upside is what he wants to maximize. If he
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is wrong on his outlook for the stock, then he needs to employ some sort of stop-loss
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measures before the maximum risk of the position is realized.
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The resulting position is shown in Figure 23-1, along with two other plots. The
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straight line marked "Spread at expiration" shows how the profitability of the call pur
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chase combined with a bull spread would look at December expiration. In addition,
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there is a plot with straight lines of the purchase of the December 100 call for 10
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points. That plot can be compared with the three-way spread to see where extra risk
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and reward occur. Note that the three-way spread does better than the outright pur
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chase of the December 100 call as long as the stock is higher than 87 at expiration.
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Since the stock is initially at 100 and,since one is initially bullish on the stock, one
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would have to surmise that the odds of it falling to 87 are fairly small. Thus, the three
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way spread outperforms the outright purchase of the call over a large range of stock
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prices.
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The final plot in Figure 23-1 is that of the three-way spread's profit and losses
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halfway to the expiration date. You can see that it looks much like the profitability of
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merely owning a call: The curve has the same shape as the call pricing curve shown
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in Chapter 1.
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Hence, this three-way strategy can often be more attractive and more profitable
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than merely owning a call option. Remember, though, that it does increase risk and
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require a larger collateral deposit than the outright purchase of the at-the-money call
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would. One can experiment with this strategy, too, in that he might consider buying
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an out-of-the-money call and selling a put spread that brings in enough credit to com
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pletely pay for the call. In that way, he would have no risk as long as the stock
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remained above the higher striking price used in the put credit spread. |