33 lines
1.2 KiB
Plaintext
33 lines
1.2 KiB
Plaintext
Gopter 6: Ratio Call Writing
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FIGURE 6-3.
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Variable ratio write (trapezoidal hedge).
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+$600
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C:
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i $
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al
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"' "' .3
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5
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;t:
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e
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0.
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$0
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Stock Price at Expiration
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Points of maximum profit = Total option premiums + Lower
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striking price - Stock price
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Downside break-even point = Lower striking price - Points of
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maximum profit
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Upside break-even point = Higher striking price + Points of
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maximum profit
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157
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Substituting the numbers from the example above will help to verify the formula.
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The total points of option premium brought in were 11 (8 for the October 60 and 3
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for the October 70). The stock price was 65, and the striking prices involved were 60
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and 70.
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Points of maximum profit = 11 + 60 - 65 = 6
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Downside break-even point= 60- 6 = 54
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Upside break-even point= 70 + 6 = 76
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Thus, the break-even points as computed by the formula agree with Table 6-5 and
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Figure 6-3. Nate that the formula applies only if the stock is initially between the two
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striking prices and the ratio is 2:1. If the stock is above both striking prices, the for
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mula is not correct. However, the writer should not be attempting to establish a vari
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able ratio write with two in-the-money calls. |