38 lines
3.1 KiB
Plaintext
38 lines
3.1 KiB
Plaintext
Chapter 26: Buying Options and Treasury Bills 419
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option expiration cycles. It should also be pointed out that T-bills can be bought and
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sold only in amounts of at least $10,000 and in increments of $5,000 thereafter. That
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is, one could buy or sell $10,000 or $15,000 or $20,000 or $25,000, and so on, but
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could not buy or sell $5,000 or $8,000 or $23,000 in T-bills. This is of little concern
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to the investor with $1 million, since it takes only a fraction of a percentage of his
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assets to be able to round up to the next $5,000 increment for a T-bill sale or pur
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chase. However, the medium-sized investor with a $50,000 portfolio might run into
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problems. While short-term T-bills do represent the best risk-free investment, the
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medium-sized investor might want to utilize one of the no-load, money market funds
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for at least part of his income-bearing assets. Such funds have only slightly more risk
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than T-bills and offer the ability to deposit and withdraw in any amount.
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The truly small investor might be feeling somewhat left out. Could it be possi
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ble to operate this strategy with a very small amount of money, such as $5,000? Yes
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it could, but there are several disadvantages.
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Example: It would be extremely difficult to keep the risk level down to 10% annual
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ly with only $5,000. For example, 5% of the money invested every 180 days is only
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$250 in each investment period. Since the option selection process that is described
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will tend to select at- or slightly out-of-the-money calls, many of these will cost more
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than 2½ points for one option. The small investor might decide to raise his risk level
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slightly, although the risk level should never exceed 20% annually, no matter how
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small the actual dollar investment. To exceed this risk level would be to completely
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defeat the purpose of the fixed-income/option purchase strategy. Obviously, this
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small investor cannot buy T-bills, for his total investable assets are below the mini
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mum $10,000 purchase level. He might consider utilizing one of the money market
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funds. Clearly, an investor of this small magnitude is operating at a double disadvan
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tage: His small dollar commitment to option purchases may preclude him from buy
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ing some of the more attractive items; and his fixed-income portion will be earning a
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smaller percentage interest rate than that of the larger investor who is in T-bills or
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some other form of relatively risk-free, income-bearing security. Consequently, the
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small investor should carefully consider his financial capability and willingness to
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adhere strictly to the criteria of this strategy before actually committing his dollars.
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It may appear to the reader that the actual dollars being placed at risk in each
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option purchase are quite small in these examples. In fact, they are rather small, but
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they have been shown to represent 10% annualized risk. An assumption was made in
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these examples that the risk in each option purchase was 100% for the holding peri
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od. This is a fairly restrictive assumption and, if it were lessened, would allow for a
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larger dollar commitment in each holding period. It is difficult and dangerous, how- |