24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Cotnbining Calendar
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and Ratio Spreads
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The previous chapters on spreading introduced the basic types of spreads. The sim
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plest forms of bull spreads, bear spreads, or calendar spreads can often be combined
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to produce a position with a more attractive potential. The butterfly spread, which is
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a combination of a bull spread and a bear spread, is an example of such a combina
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tion. The next three chapters are devoted to describing other combinations of
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spreads, wherein the strategist not only mixes basic strategies ..:... bull, bear, and calen
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dar - but uses varying expiration dates as well. Although they may seem overly com
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plicated at first glance, these combinations are often employed by professionals in the
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field.
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RATIO CALENDAR SPREAD
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The ratio cdendar spread is a combination of the techniques used in the calendar
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and ratio spreads. Recall that one philosophy of the calendar spread strategy was to
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sell the near-term call and buy a longer-term call, with both being out-of-the-money.
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This is a bullish calendar spread. If the underlying stock never advances, the spread
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er loses the entire amount of the relatively small debit that he paid for the spread.
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However, if the stock advances after the near-term call expires worthless, large prof
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its are possible. It was stated that this bullish calendar spread philosophy had a small
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probability of attaining large profits, and that the few profits could easily exceed the
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preponderance of small losses.
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The ratio calendar spread is an attempt to raise the probabilities while allowing
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for large potential profits. In the ratio calendar spread, one sells a number of near-
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