Files
ollama-model-training-5060ti/training_data/curated/text/08b6838c6e830135ca23f34cbad848cdb0e6fa9a7aec66674ec1a1516541c9fd.txt

35 lines
2.6 KiB
Plaintext
Raw Blame History

This file contains invisible Unicode characters
This file contains invisible Unicode characters that are indistinguishable to humans but may be processed differently by a computer. If you think that this is intentional, you can safely ignore this warning. Use the Escape button to reveal them.
296 Part Ill: Put Option Strategies
other available put writing positions before deciding to write another put on the sam<'
underlying stock. His commission costs are the same if he remains in XYZ stock or if
he goes on to a put writing position in a different stock.
EVALUATING A NAKED PUT WRITE
The computation of potential returns from a naked put write is not as straightforward
as were the computations for covered call writing. The reason for this is that the col­
lateral requirement changes as the stock moves up or down, since any naked option
position is marked to the market. The most conservative approach is to allow enough
collateral in the position in case the underlying stock should fall, thus increasing the
requirement. In this way, the naked put writer would not be forced to prematurely
close a position because he cannot maintain the margin required.
Example: XYZ is at 50 and the October 50 put is selling for 4 points. The initial col­
lateral requirement is 20% of 50 plus $400, or $1,400. There is no additional require­
ment, since the stock is exactly at the striking price of the put. Furthermore, let us
assume that the writer is going to close the position should the underlying stock fall
to 43. To maintain his put write, he should therefore allow enough margin to collat­
eralize the position if the stock were at 43. The requirement at that stock price would
be $1,560 (20% of 43 plus at least 7 points for the in-the-money amount). Thus, the
put writer who is establishing this position should allow $1,560 of collateral value for
each put written. Of course, this collateral requirement can be reduced by the
amount of the proceeds received from the put sale, $400 per put less commissions in
this example. If we assume that the writer sells 5 puts, his gross premium inflow
would be $2,000 and his commission expense would be about $75, for a net premi­
um of $1,925.
Once this information has been determined, it is a simple matter to determine
the maximum potential return and also the downside break-even point. To achieve
the maximum potential return, the put would expire worthless with the underlying
stock above the striking price. Therefore, the maximum potential profit is equal to
the net premium received. The return is merely that profit divided by the collateral
used. In the example above, the maximum potential profit is $1,925. The collateral
required is $1,560 per put (allowing for the stock to drop to 43) or $7,800 for 5 puts,
reduced by the $1,925 premium received, for a total requirement of $5,875. The
potential return is then $1,925 divided by $5,875, or 32.8%. Table 19-2 summarizes
these calculations.