40 lines
1.6 KiB
Plaintext
40 lines
1.6 KiB
Plaintext
120
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FIGURE 4-1.
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Protected short sale.
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C:
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0 .:;
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~
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'a.. X
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UJ
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1o +$0 en en
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0
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...J
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0
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-e
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0.-$300
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40'
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',
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Stock Price at Expiration
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'
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Part II: Call Option Strategies
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43
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', ', ' ', ' ',
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Short ',
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' Sale 'll
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5½ points - the five points between the current stock price of 40 and the striking
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price of 45, plus the amount paid for the call. On the other hand, if XYZ declines, the
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protected short seller will make nearly as much as the short seller who did not pro
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tect, since he only spent ½ point for the long call.
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If one buys an in-the-nwney call as protection for the short sale, his risk will be
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quite minimal. However, his profit potential will be severely limited. As an example,
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with XYZ at 40, if one had purchased a July 35 call at 5½, his risk would be limited
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to½ point anywhere above 35 at July expiration. Unfortunately, he would not realize
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any profit on the position until the stock went below 34½, a drop of 5½ points. This
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is too much protection, for it limits the profit so severely that there is only a small
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hope of making a profit.
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Generally, it is best to buy a call that is at-the-nwney or only slightly out-of the
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money as the protection for the short sale. It is not of much use to buy a deeply out
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of-the-money call as protection, since it does very little to moderate risk unless the
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stock climbs quite dramatically. Normally, one would cover a short sale before it went
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heavily against him. Thus, the money spent for such a deeply out-of-the-money call
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is wasted. However, if one wants to give a short sale plenty of room to "work" and |