41 lines
2.0 KiB
Plaintext
41 lines
2.0 KiB
Plaintext
Chapter 2: Covered Call Writing 77
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the writer would buy back only 5 of the January 20's and sell 5 January 15 calls. He
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would then have this position:
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long 1,000 XYZ at 20;
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short 5 XYZ January 20's at 2;
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short 5 XYZ January 15's at 2½; and
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realized gain, $750 from 5 January 20's.
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This strategy is generally referred to a partial roll-down, in which only a portion of
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the original calls is rolled, as opposed to the more conventional complete roll-down.
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Analyzing the partially rolled position makes it clear that the writer no longer locks
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in a loss.
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IfXYZ rallies back above 20, the writer would, at expiration, sell 500 XYZ at 20
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(breaking even) and 500 at 15 (losing $2,500 on this portion). He would make $1,000
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from the five January 20's held until expiration, plus $1,250 from the five January 15's,
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plus the $750 of realized gain from the January 20's that were rolled down. This
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amounts to $3,000 worth of option profits and $2,500 worth of stock losses, or an
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overall net gain of $500, less commissions. Thus, the partial roll-down offers the
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writer a chance to make some profit if the stock rebounds. Obviously, the partial roll
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down will not provide as much downside protection as the complete roll-down does,
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but it does give more protection than not rolling down at all. To see this, compare the
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results given in Table 2-23 if XYZ is at 15 at expiration.
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TABLE 2-23.
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Stock at 15 at expiration.
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Strategy
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Original position
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Partial roll-down
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Complete roll-down
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Stock Loss
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-$5,000
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- 5,000
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- 5,000
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Option
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Profit Total Loss
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+$2,000 -$3,000
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+ 3,000 - 2,000
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+ 4,000 - 1,000
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In summary, the covered writer who would like to roll down, but who does not
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want to lock in a loss or who feels the stock may rebound somewhat before expira
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tion, should consider rolling down only part of his position. If the stock should con
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tinue to drop, making it evident that there is little hope of a strong rebound back to
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the original strike, the rest of the position can then be rolled down as well. |