37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
615
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Note that the sale of these calls effectively puts a cap on the profit potential of
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investor's overall position until the December expiration of the listed calls. If $SPX
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were to rise substantially above 1,250, his profits would be "capped" because the two
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were sold. Thus, he has effectively taken his synthetic long call position and con
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verted it into a bull spread (or a collared index fund, if you prefer that description).
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In reality, any calls written against the structured product would have to be
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margined as naked calls. In a virtual sense, the 15,000 shares of the structured prod
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Ut't "cover" the sale of 2 $SPX calls, but margin rules don't allow for that distinction.
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In essence, the sale of two calls would create a bull spread. Alternatively, if one thinks
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uf the structured product as a long index fully protected by a put (which is another
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way to consider it), then the sale of the $SPX listed call produces a "collar."
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Of course, one could write more than two $SPX calls, if he had the required
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margin in his account. This would create the equivalent of a call ratio spread, and
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would have the properties of that strategy: greatest profit potential at the striking
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price of the written calls, limited downside profit potential, and theoretically unlim
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ited upside risk if $SPX should rise quickly and by a large amount.
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In any of these option writing strategies, one might want to write out-of-the
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money, short-term calls against his structured product periodically or continuously.
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Such a strategy would produce good results if the underlying index does not advance
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quickly while the written calls are in place. However, if the index should rise through
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the striking price of the written calls, such a strategy would detract from the overall
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return of the structured product.
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Changing the Striking Price. Another strategy that the investor could use
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if he so desired is to establish a vertical call spread in order to effectively change
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the striking price of the (imbedded) call. For example, if the market had advanced
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by a great deal since the product was bought, the imbedded call would theoreti
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cally have a nice profit. If one could sell it and buy another, similar call at a high
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er strike, he would effectively ~olling his call up. This would raise the striking
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price and would reduce downside risk greatly (at the cost of slightly reducing
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upside profit potential).
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Example: Using the same product as in the previous example, suppose that the
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investor who owns the structured product considers another alternative. In the pre
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vious example, he evaluated the possibility of selling a slightly out-of-the-money list
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ed call to effectively produce a collared position, or a bull spread. The problem with
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that is that it limits upside profit potential. If the market were to continue to rise, he
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would only participate up to the higher strike (plus the premium received). |