36 lines
2.1 KiB
Plaintext
36 lines
2.1 KiB
Plaintext
182 Part II: Call Option Strategies
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TABLE 7-3.
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Lowering the break-even price on common stock.
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XYZ Price at Profit on Profit on Short Profit on long Total
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Expiration Stock October 45's October 40 Profit
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35 -$1,300 +$400 -$400 -$1,300
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38 - 1,000 + 400 - 400 - 1,000
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40 800 + 400 - 400 800
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42 600 + 400 - 200 400
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43 500 + 400 - 100 200
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44 400 + 400 0 0
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45 300 + 400 + 100 + 200
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48 0 - 200 + 400 + 200
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50 + 200 - 600 + 600 + 200
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tion. Below 40, the two strategies produce the same result. Finally, between 40 and
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50, the new position outperforms the original stockholder's position.
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In summary, then, the stockholder stands to gain much and gives away very lit
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tle by adding the indicated options to his stock position. If the stock stabilizes at all -
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anywhere between 40 and 50 in the example above - the new position would be an
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improvement. Moreover, the investor can break even or make profits on a small rally.
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If the stock continues to drop heavily, nothing additional will be lost except for option
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commissions. Only if the stock rallies very sharply will the stock position outperform
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the total position.
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This strategy- combining a covered write and a bull spread - is sometimes used
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as an initial ( opening) trade as well. That is, an investor who is considering buying
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XYZ at 42 might decide to buy the October 40 and sell two October 45's (for even
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money) at the outset. The resulting position would not be inferior to the outright pur
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chase of XYZ stock, in terms of profit potential, unless XYZ rose above 46 by October
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expiration.
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Bull spreads may also be used as a "substitute" for covered writing. Recall from
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Chapter 2 that writing against warrants can be useful because of the smaller invest
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ment required, especially if the warrant was in-the-money and was not selling at
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much of a premium. The same thinking applies to call options. If there is an in-the
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money call with little or no time premium remaining in it, its purchase may be used
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as a substitute for buying the stock itself Of course, the call will expire, whereas the
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stock will not; but the profit potential of owning a deeply in-the-money call can be |