42 lines
1.9 KiB
Plaintext
42 lines
1.9 KiB
Plaintext
150 Part II: Call Option Strategies
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INVESTMENT REQUIRED
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The ratio writer has a combination of covered writes and naked writes. The margin
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requirements for each of these strategies have been described previously, and the
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requirements for a ratio writing strategy are the sum of the requirements for a naked
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write and a covered write. Ratio writing is normally done in a margin account,
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although one could technically keep the stock in a cash account.
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Example: Ignoring commissions, the investment required can be computed as fol
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lows: Buy 100 XYZ at 49 on 50% margin and sell 2 XYZ October 50 calls at 6 points
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each (Table 6-2). The commissions for buying the stock and selling the calls would be
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added to these requirements. A shorter formula (Table 6-3) is actually more desirable
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to use. It is merely a combination of the investment requirements listed in Table 6-2.
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In addition to the basic requirement, there may be minimum equity require
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ments and maintenance requirements, since naked calls are involved. As these vary
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from one brokerage firm to another, it is best for the ratio writer to check with his
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broker to determine the equity and maintenance requirements. Again, since naked
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calls are involved in ratio writing, there will be a mark to market of the position. If
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the stock should rise in price, the investor will have to put up more collateral.
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It is conceivable that the ratio writer would want to stay with his original posi
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tion as long as the stock did not penetrate the upside break-even point of 63.
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TABLE 6-2.
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Investment required.
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Covered writing portion (buy 100 XYZ and sell 1 call)
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50% of stock price
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Less premium received
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Requirement for covered portion
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Naked writing portion (sell 1 XYZ call)
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20% of stock price
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Less out-of-the-money amount
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Plus call premium
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Less premium received
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Requirement for naked portion
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Total requirement for ratio write
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$2,450
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600
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$1,850
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$ 980
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100
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+ 600
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600
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$ 880
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$2,730 |