38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
334 Part Ill: Put Option Strategies
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In a neutral calendar spread, one sets up the spread with the idea of closing the
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spread when the near-term call or put expires. In this type of spread, the maximum
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profit will be realized if the stock is exactly at the striking price at expiration. The
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spreader is merely attempting to capitalize on the fact that the time value premium
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disappears more rapidly from a near-term option than it does from a longer-term one.
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Example: XYZ is at 50 and a January 50 put is selling for 2 points while an April 50
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put is selling for 3 points. A neutral calendar spread can be established for a 1-point
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debit by selling the January 50 put and buying the April 50 put. The investment
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required for this position is the amount of the net debit, and it must be paid for in
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full. If XYZ is exactly at 50 at January expiration, the January 50 put will expire worth
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less and the April 50 put will be worth about 2 points, assuming other factors are the
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same. The neutral spreader would then sell the April 50 put for 2 points and take his
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profit. The spreader's profit in this case would be one point before commissions,
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because he originally paid a 1-point debit to set up the spread and then liquidates the
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position by selling the April 50 put for 2 points. Since commission costs can cut into
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available profits substantially, spreads should be established in a large enough quan
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tity to minimize the percentage cost of commissions. This means that at least 10
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spreads should be set up initially.
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In any type of calendar spread, the risk is limited to the amount of the net debit.
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This maximum loss would be realized if the underlying stock moved substantially far
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away from the striking price by the time the near-term option expired. If this hap
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pened, both options would trade at nearly the same price and the differential would
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shrink to practically nothing, the worst case for the calendar spreader. For example,
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if the underlying stock drops substantially, say to 20, both the near-term and the long
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term put would trade at nearly 30 points. On the other hand, if the underlying stock
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rose substantially, say to 80, both puts would trade at a very low price, say 1/15 or 1/s,
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and again the spread would shrink to nearly zero.
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Neutral call calendar spreads are generally superior to neutral put calendar
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spreads. Since the amount of time value premium is usually greater in a call option
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(unless the underlying stock pays a large dividend), the spreader who is interested in
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selling time value would be better off utilizing call options.
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The second philosophy of calendar spreading is a more aggressive one. With put
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options, a bearish strategy can be constructed using a calendar spread. In this case,
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one would establish the spread with out-of-the-money puts.
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Example: With XYZ at 55, one would sell the January 50 put for 1 point and buy the
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April 50 put for 1 ½ points. He would then like the underlying stock to remain above
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the striking price until the near-term January put expires. If this happens, he would |