25 lines
1.8 KiB
Plaintext
25 lines
1.8 KiB
Plaintext
CHAPCIJER 18
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Buying Puts in Conjunction
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with Call Purchases
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There are several ways in which the purchases of both puts and calls can be used to
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the speculator's advantage. One simple method is actually a follow-up strategy for the
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call buyer. If the stock has advanced and the call buyer has a profit, he might con
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sider buying a put as a means of locking in his call profits while still allowing for more
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potential upside appreciation. In Chapter 3, four basic alternatives were listed for the
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call buyer who had a profit: He could liquidate the call and take his profit; he could
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do nothing; he could "roll up" by selling the call for a profit and using part of the pro
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ceeds to purchase more out-of-the-money calls; or he could create a bull spread by
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selling the out-of-the-money call against the profitable call that he holds. If the
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underlying stock has listed puts, he has another alternative: He could buy a put. This
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put purchase would serve to lock in some of the profits on the call and would still
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allow room for further appreciation if the stock should continue to rise in price.
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Example: An investor initially purchased an XYZ October 50 call for 3 points when
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the stock was at 48. Sometime later, after the stock had risen to 58, the call would be
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worth about 9 points. If there was an October 60 put, it might be selling for 4 points,
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and the call holder could buy this put to lock in some of his profits. His position, after
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purchasing the put, would be:
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Long l October 50 call at 3 points N t t 7 • t - e cos: pom s Long l October 60 put at 4 points
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He would own a "strangle" - any position consisting of both a put and a call with dif
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fering terms - that is always worth at least 10 points. The combination will be worth
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exactly 10 points at expiration if XYZ is anywhere between 50 and 60. For example,
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