37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
O.,,ter 18: Buying Puts in Conjunction with Call Purchases 289
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there are some differences, as the following discussion will demonstrate. Suppose the
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following prices exist:
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XYZ common, 47;
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XYZ January 45 put, 2; and
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XYZ January 50 call, 2.
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In this example, both options are out-of-the-money when purchased. This, again, is
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the most normal application of the strangle purchase. If XYZ is still between 45 and
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50 at January expiration, both options will expire worthless and the strangle buyer
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will lose his entire investment. This investment - $400 in the example - is generally
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smaller than that required to buy a straddle on XYZ. If XYZ moves in either direc
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tion, rising above 50 or falling below 45, the strangle will have some value at expira
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tion. In this example, ifXYZ is above 54 at expiration, the call will be worth more than
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4 points (the put will expire worthless) and the buyer will make a profit. In a similar
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manner, if XYZ is below 41 at expiration, the put will have a value greater than 4
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points and the buyer would make a profit in that case as well. The potential profits
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are quite large if the underlying stock should nwve a great deal before the options
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expire. Table 18-2 and Figure 18-2 depict the potential profits or losses from this
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position at January expiration. The maximum loss is possible over a much wider range
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than that of a straddle. The straddle achieves its maximum loss only if the stock is
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exactly at the striking price of the options at expiration. However, the strangle has its
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maximum loss anywhere between the two strikes at expiration. The actual amount of
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the loss is smaller for the strangle, and that is a compensating factor. The potential
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profits are large for both strategies.
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The example above is one in which both options are out-of-the money. It is also
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possible to construct a very similar position by utilizing in-the-money options.
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Example: With XYZ at 47 as before, the in-the-money options might have the fol
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lowing prices: XYZ January 45 call, 4; and XYZ January 50 put, 4. If one purchased
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this in-the-rrwney strangle, he would pay a total cost of 8 points. However, the value
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of this strangle will always be at least 5 points, since the striking price of the put is 5
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points higher than that of the call. The reader has seen this sort of position before,
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when protective follow-up strategies for straddle buying and for call or put buying
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were described. Because the strangle will always be worth at least 5 points, the most
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that the in-the-money strangle buyer can lose is 3 points in this example. His poten
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tial profits are still unlimited should the underlying stock move a large distance.
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Thus, even though it requires a larger initial investment, the in-the-rrwney strangle
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may often be a superior strategy to the out-of the-rrwney strangle, from a buyer's |