38 lines
2.7 KiB
Plaintext
38 lines
2.7 KiB
Plaintext
Chapter 6: Ratio Call Writing 163
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culation is that an entire, possibly complex option position can be reduced to one
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number. The ESP shows how the position will behave for short-term market move
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ments.
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Look again at the previous example of a ratio write. The position was long 300
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shares and short 5 options with a current delta of .80 after the stock had risen to 57.
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The ESP of the 5 October 50's is short 400 shares (5 x .80 x 100 shares per option).
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The position is also long 300 shares of stock, so the total ESP of this ratio write is
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short 100 shares.
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This figure gives the strategist a measure of perspective on his position. He now
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knows that he has a position that is the equivalent of being short 100 shares of XYZ.
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Perhaps he is bearish on XYZ and therefore decides to do nothing. That would be
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fine; at least he knows that his position is short.
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Normally, however, the strategist would want to adjust his position. Again
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returning to the previous example, he has several choices in reducing the ESP back
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to neutral. An ESP of O is considered to be a perfectly neutral position. Obviously,
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one could buy 100 shares of XYZ to reduce the 100-share delta short. Or, given that
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the delta of the October 50 call is .80, he could buy in 1.25 of these short calls (obvi
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ously he could only buy l; fractional options cannot be purchased).
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Later chapters include more discussions and examples using the ESP. It is a
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vital concept that no strategist who is operating positions involving multiple options
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should be without. The only requirement for calculating it is to know the delta of the
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options in one's position. Those are easily obtainable from one's broker or from a
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number of computer services, software programs, or Web sites.
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For investors who do not have the funds or are not in a position to utilize such
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a ratio adjusting strategy, there is a less time-consuming method of taking defensive
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action in a ratio write.
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USING STOP ORDERS AS A DEFENSIVE STRATEGY
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A ratio writer can use buy or sell stops on his stock position in order to automatical
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ly and unemotionally adjust the ratio of his position. This type of defensive strategy
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is not an aggressive one and will provide some profits unless a whipsaw occurs in the
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underlying stock.
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As an example of how the use of stop orders can aid the ratio writer, let us again
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assume that the same basic position was established by buying XYZ at 49 and selling
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two October 50 calls at 6 points each. This produces a profit range of 37 to 63 at expi
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ration. If the stock begins to move up too far or to fall too far, the ratio writer can
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adjust the ratio of calls short to stock long automatically, through the use of stop
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orders on his stock. |