31 lines
1.4 KiB
Plaintext
31 lines
1.4 KiB
Plaintext
68 • The Intelligent Option Investor
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assumption. Because these are the two biggest determinants, let’s take a
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look at some common examples in which a change in one offsets or exac-
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erbates a change in the other.
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Following are a few examples of how interactions between the variables
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sometimes appear. For each of these examples, I am assuming a shorter
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investment time horizon than I usually do because most people who get hurt
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by some adverse combination of variables exacerbate their pain by trading
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short-term contracts, where the effect of time value is particularly severe.
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Falling Volatility Offsets Accurate Directional Prediction
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Let’s say that we are expecting Advanced Building Corp. to announce that it
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will release a new product and that we believe that this product announcement
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will generate a significant short-term boost in the stock price. We think that
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the $50 stock price could pop up to $55, so we buy some short-dated calls
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struck at $55, figuring that if the price does pop, we can sell the calls struck at
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$55 for a handsome profit. Here’s a diagram of what we are doing:
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20
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25
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30
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35
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40Stock Price
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45
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50
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55
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60
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Advanced Building Corp. (ABC)
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65
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GREEN
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As you should be able to tell by this diagram, this call option should
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be pretty cheap—there is a little corner of the call option’s range of expo-
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sure within the BSM cone, but not much. |