34 lines
2.3 KiB
Plaintext
34 lines
2.3 KiB
Plaintext
312 Part Ill: Put Optian Strategies
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3½ points. Thus, if XYZ should reverse direction and be within 3½ points of the
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striking price - that is, anywhere below 48½ - at expiration, the position will pro
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duce a profit. In fact, if XYZ should be below 45 at expiration, the entire bear
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spread will expire worthless and the strategist will have made a 3½-point profit.
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Finally, this repurchase of the put releases the margin requirement for the naked
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put, and will generally free up excess funds so that a new straddle position can be
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established in another stock while the low-requirement bear spread remains in
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place.
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In summary, this type of follow-up action is broader in purpose than any of the
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simpler buy-back strategies described earlier. It will limit the writer's loss, but not
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prevent him from making a profit. Moreover, he may be able to release enough mar
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gin to be able to establish a new position in another stock by buying in the uncov
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ered puts at a fractional price. This would prevent him from tying up his money
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completely while waiting for the original straddle to reach its expiration date. The
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same type of strategy also works in a downward market. If the stock falls after the
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straddle is written, one can buy the put at the next lower strike to limit the down
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side risk, while still allowing for profit potential if the stock rises back to the striking
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price.
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EQUIVALENT STOCK POSITION FOLLOW-UP
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Since there are so many follow-up strategies that can be used with the short straddle,
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the one method that summarizes the situation best is again the equivalent stock posi
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tion (ESP). Recall that the ESP of an option position is the multiple of the quantity
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times the delta times the shares per option. The quantity is a negative number if it is
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referring to a short position. Using the above scenario, an example of the ESP
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method follows:
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Example: As before, assume that the straddle was originally sold for 7 points, but the
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stock rallied. The following prices and deltas exist:
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XYZ common, 50;
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XYZ Jan 45 call, 7; delta, .90;
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XYZ Jan 45 put, l; delta, - .10; and
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XYZ Jan 50 call, 3; delta, .60.
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Assume that 8 straddles were sold initially and that each option is for 100 shares of
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XYZ. The ESP of these 8 short straddles can then be computed: |