34 lines
1.9 KiB
Plaintext
34 lines
1.9 KiB
Plaintext
258 Part Ill: Put Option Strategies
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chase can achieve. If the underlying stock remains relatively unchanged, the short
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seller would do better because he does not risk losing his entire investment in a lim
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ited amount of time if the underlying stock changes only slightly in price. However,
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if the underlying stock should rise dramatically, the short seller can actually lose more
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than his initial investment. The short sale of stock has theoretically unlimited risk.
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Such is not true of the put option purchase, whereby the risk is limited to the amount
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of the initial investment. One other point should be made when comparing the pur
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chase of a put and the short sale of stock: The short seller of stock is obligated to pay
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the dividends on the stock, but the put option holder has no such obligation. This is
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an additional advantage to the holder of the put.
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TABLE 16-2.
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Results of selling short.
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XYZ Price at Put Option
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Expiration Short Sale Purchase
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20 + $3,000 (+ 120%) +$2,500 (+ 500%)
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30 + 2,000 (+ 80%) + 1,500 (+ 300%)
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40 + 1,000 (+ 40%) + 500 (+ 100%)
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45 + 500(+ 20%) 0( 0%)
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48 + 200(+ 80%) 300 (- 60%)
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50 0( 0%) 500 (- 100%)
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60 - 1,000 (- 40%) 500 (- 100%)
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75 - 2,500 (- 100%) 500 (- 100%)
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100 - 5,000 (- 200%) 500 (- 100%)
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SELECTING WHICH PUT TO BUY
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Many of the same types of analyses that the call buyer goes through in deciding which
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call to buy can be used by the prospective put buyer as well. First, when approach
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ing put buying as a speculative strategy, one should not place more than 15% of his
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risk capital in the strategy. Some investors participate in put buying to add some
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amount of downside protection to their basically bullishly-oriented common stock
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portfolios. More is said in Chapter 17 about buying puts on stocks that one actually
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owns.
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The out-ofthe-nwney put offers both higher reward potentials and higher risk
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potentials than does the in-the-nwney put. If the underlying stock drops substantial- |