38 lines
2.6 KiB
Plaintext
38 lines
2.6 KiB
Plaintext
Chapter 23: Spreads Combining Calls and Puts 345
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THREE USEFUL BUT COMPLEX STRATEGIES
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The three strategies presented in this section are all designed to limit risk while
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allowing for large potential profits if correct market conditions develop. Each is a
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combination strategy - that is, it involves both puts and calls and each is a calendar
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strategy, in which near-term options are sold and longer-term options are bought. (A
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fourth strategy that is similar in nature to those about to be discussed is presented in
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the next chapter.) Although all of these are somewhat complex and are for the most
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advanced strategist, they do provide attractive risk/reward opportunities. In addition,
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the strategies can be employed by the public customer; they are not designed strict
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ly for professionals. All three strategies are described conceptually in this section;
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specific selection criteria are presented in the next section.
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A TWO-PRONGED ATTACK {THE CALENDAR COMBINATION}
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A bullish calendar spread was shown to be a rather attractive strategy. A bullish call
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calendar spread is established with out-of-the-money calls for a relatively small debit.
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If the near-term call expires worthless and the stock then rises substantially before
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the longer-term call expires, the profits could potentially be large. In any case, the
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risk is limited to the small debit required to establish the spread. In a similar man
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ner, the bearish calendar spread that uses put options can be an attractive strategy
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as well. In this strategy, one would set up the spread with out-of-the-money puts. He
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would then want the near-term put to expire worthless, followed by a substantial drop
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in the stock price in order to profit on the longer-term put.
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Since both strategies are attractive by themselves, the combination of the two
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should be attractive as well. That is, with a stock midway between two striking prices,
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one might set up a bullish out-of-the-money call calendar spread and simultaneously
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establish a bearish out-of-the-money put calendar spread. If the stock remains rela
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tively stable, both near-term options would expire worthless. Then a substantial stock
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price movement in either direction could produce large profits. With this strategy,
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the spreader does not care which direction the stock moves after the near options
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expire worthless; he only hopes that the stock becomes volatile and moves a large dis
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tance in either direction.
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Example: Suppose that the following prices exist three months before the January
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options expire:
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January 70 call: 3
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April 70 call: 5
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XYZ common: 65
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January 60 put: 2
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April 60 put: 3 |