43 lines
2.9 KiB
Plaintext
43 lines
2.9 KiB
Plaintext
224 Part II: Call Option Strategies
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before April expiration. He should then figure his collateral requirement as if the
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stock were at 53, regardless of what the collateral requirement is at the current time.
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This is a prudent tactic whenever naked options are involved, since the strategist will
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never be forced into an unwanted close-out before his defensive action point is
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reached. The collateral required for this example would then be as follows, assuming
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the call is trading at 3½:
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20% of 53
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Call premium
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Less initial credit
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Total collateral to set aside
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$1,060
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+ 350
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-___fill
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$1,360
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The strategist is not really "investing" anything in this strategy, because his require
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ment is in the form of collateral, not cash. That is, his current portfolio assets need
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not be disturbed to set up this spread, although losses would, of course, create deb
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its in the account. Many naked option strategies are similar in this respect, and the
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strategist may earn additional money from the collateral value of his portfolio with
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out disturbing the portfolio itself. However, he should take care to operate such
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strategies in a conservative manner, since any income earned is "free," but losses may
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force him to disturb his portfolio. In light of this fact, it is always difficult to compute
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returns on investment in a strategy that requires only collateral to operate. One can,
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of course, compute the return on the maximum collateral required during the life of
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the position. The large investor participating in such a strategy should be satisfied
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with any sort of positive return.
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Returning to the example above, the strategist would make his $50 credit, less
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commissions, if the underlying stock remained below 50 until July expiration. It is not
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possible to determine the results to the upside so definitively. If the April 50 calls
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expire worthless and then the stock rallies, the potential profits are limited only by
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time. The case in which the stock rallies before April expiration is of the most con
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cern. If the stock rallies immediately, the spread will undoubtedly show a loss. If the
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stock rallies to 50 more slowly, but still before April expiration, it is possible that the
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spread will not have changed much. Using the same example, suppose that XYZ ral
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lies to 50 with only a few weeks of life remaining in the April 50 calls. Then the April
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50 calls might be selling at l ½ while the July 50 call might be selling at 3. The ratio
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spread could be closed for even money at that point; the cost of buying back the 2
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April 50's would equal the credit received from selling the one July 50. He would thus
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make½ point, less commissions, on the entire spread transaction. Finally, at the expi
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ration date of the April 50 calls, one can estimate where he would break even.
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Suppose one estimated that the July 50 call would be selling for 5½ points if XYZ
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were at 53 at April expiration. Since the April 50 calls would be selling for 3 at that |