60 lines
1.4 KiB
Plaintext
60 lines
1.4 KiB
Plaintext
Chapter 17: Put Buying in Conjundion with Common Stock Ownership
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TABLE 17·2.
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Comparison of regular and protected covered writes.
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XYZ Price at Stock October 40 October 35
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Expiration Profit Call Profit Put Profit
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25 -$1,400 +$300 +$950
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30 900 + 300 + 450
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35 400 + 300 - 50
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36.50 250 + 300 - 50
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38 100 + 300 - 50
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40 + 100 + 300 - 50
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45 + 600 - 200 - 50
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50 + 1,100 - 700 - 50
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FIGURE 17-2.
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Covered call write protected by a put purchase.
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C
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0
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e ·5.
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X
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LU
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co $0 CJ)
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CJ)
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0 .J
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0
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~ -$150 a..
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,,
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},.,,'
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;
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,,
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Regular
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Covered ,,'
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Write/
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36 / , ,
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;
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,,'
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+$400
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,----------➔ ,,,' _____ ...,..
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, +$350
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,,,'
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40
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Stock Price at Expiration
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277
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Total
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Profit
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-$150
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- 150
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- 150
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0
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+ 150
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+ 350
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+ 350
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+ 350
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The longer-term effects of buying puts in combination with covered writes are
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not easily definable, but it would appear that the writer reduces his overall rate of
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return slightly by buying the puts. This is because he gives something away if the
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stock falls slightly, remains unchanged, or rises in price. He only "gains" something if
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the stock falls heavily. Since the odds of a stock falling heavily are small in compari
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son to the other events (falling slightly, remaining unchanged, or rising), the writer
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will be gaining something in only a small percentage of cases. However, the put buy
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ing strategy may still prove useful in that it removes the emotional uncertainty of |