40 lines
3.3 KiB
Plaintext
40 lines
3.3 KiB
Plaintext
Chapter 9: Calendar Spreads 195
|
||
on the position. Another choice is to leave the spread alone until the near-term call
|
||
expires and then to hope for a partial recovery from the stock in order to be able to
|
||
recover some value from the long side of the spread. Such a holding action is often
|
||
better than the immediate close-out, because the expense of buying back the short
|
||
call can be quite large percentagewise. A riskier downside defensive action is to sell
|
||
out the long call if the stock begins to break down heavily. In this way, the spreader
|
||
recovers something from the long side of his spread immediately, and then looks for
|
||
the stock to remain depressed so that the short side of the spread will expire worth
|
||
less. This action requires that one have enough collateral available to margin the
|
||
resulting naked call, often an amount substantially in excess of the original debit paid
|
||
for the spread. Moreover, if the underlying stock should reverse direction and rally
|
||
back to or above the striking price, the short side of the spread is naked and could
|
||
produce substantial losses. The risk assumed by such a follow-up violates the initial
|
||
neutral premise of the spread, and should therefore be avoided. Of these three types
|
||
of downside defensive action, the easiest and rrwst conservative one is to do nothing
|
||
at all, letting the short call expire worthless and then hoping for a recovery by the
|
||
underlying stock. If this tack is taken, the risk remains fixed at the original debit paid
|
||
for the spread, and occasionally a rally may produce large profits on the long call.
|
||
Although this rally is a nonfrequent event, it generally costs the spreader very little
|
||
to allow himself the opportunity to take advantage of such a rally if it should occur.
|
||
In fact, the strategist can employ a slight modification of this sort of action, even
|
||
if the spread is not at a large loss. If the underlying stock is moderately below the
|
||
striking price at near-term expiration, the short option will expire worthless and the
|
||
spreader will be left holding the long option. He could sell the long side immediate
|
||
ly and perhaps take a small gain or loss. However, it is often a reasonable strategy to
|
||
sell out a portion of the long side - recovering all or a substantial portion of the ini
|
||
tial investment - and hold the remainder. If the stock rises, the remaining long posi
|
||
tion may appreciate substantially. Although this sort of action deviates from the true
|
||
nature of the time spread, it is not overly risky.
|
||
An early breakout to the upside by the underlying stock is generally handled in
|
||
much the same way as a downside breakout. Doing nothing is often the best course
|
||
of action. If the underlying stock rallies shortly after the spread is established, the
|
||
spread will shrink by a small amount, but not substantially, because both options will
|
||
hold premium in a rally. If the spreader were to rush in to close the position, he
|
||
would be paying commissions on two rather expensive options. He will usually do
|
||
better to wait and give himself as much of a chance for a reversal as possible. In fact,
|
||
even at near-term expiration, there will normally be some time premium left in the
|
||
long option so that the maximum loss would not have to be realized. A highly risk
|
||
oriented upside defensive action is to cover the short call on a technical breakout and |