39 lines
1.7 KiB
Plaintext
39 lines
1.7 KiB
Plaintext
Cl,apter 6: Ratio Call Writing
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TABLE 6-3.
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Initial investment required for a ratio write.
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70% of stock cost (XYZ = 49)
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Plus naked call premiums
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Less total premiums received
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Plus or minus striking price differential
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on naked calls
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$3,430
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+ 600
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- 1,200
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100
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151
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Total requirement $2,730 (plus commissions)
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TABLE 6-4.
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Collateral required with stock at upside break-even point of 63.
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Covered writing requirement $1,850 (see Table 6-2)
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20% of stock price (XYZ = 63) 1,260
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Plus call premium
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Less initial call premium received
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Total requirement with XYZ at 63
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1,400
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600
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$3,910
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Therefore, he should allow for enough collateral to cover the eventuality of a move
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to 63. Assuming the October 50 call is at 14 in this case, he would need $3,910 (see
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Table 6-4). This is the requirement that the ratio writer should be concerned with,
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not the initial collateral requirement, and he should therefore plan to invest $3,910
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in this position, not $2,730 ( the initial requirement). Obviously, he only has to put up
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$2,730, but from a strategic point of view, he should allow $3,910 for the position. If
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the ratio writer does this with all his positions, he would not receive a margin call
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even if all the stocks in his portfolio climbed to their upside break-even points.
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SELECTION CRITERIA
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To decide whether a ratio write is a desirable position, the writer must first determine
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the break-even points of the position. Once the break-even points are known, the
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writer can then decide if the position has a wide enough profit range to allow for
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defensive action if it should become necessary. One simple way to determine if the
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profit range is wide enough is to require that the next higher and lower striking prices
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be within the profit range. |