33 lines
2.5 KiB
Plaintext
33 lines
2.5 KiB
Plaintext
288 Part Ill: Put Option Strategies
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A rrwre desirable sort off allow-up action would be one whereby the straddle
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buyer could retain much of the profit already built up without limiting further poten
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tial profits if the stock continues to run. In the example above, the straddle buyer
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could use the January 45 put - the one at the higher price - for this purpose.
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Example: Suppose that when the stock got to 45, he sold the put that he owned, the
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January 40, for 1 point, and simultaneously bought the January 45 put for 3 points.
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This transaction would cost 2 points, and would leave him in the following position:
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Long 1 January 40 call C b· d t 8 . t - om me cos : porn s Long 1 January 45 put
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He now owns a combination at a cost of 8 points. However, no matter where the
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underlying stock is at expiration, this combination will be worth at least 5 points,
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since the put has a striking price 5 points higher than the call's striking price. In fact,
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if the stock is above 45 at expiration or is below 40 at expiration, the straddle will be
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worth more than 5 points. This follow-up action has not limited the potential profits.
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If the stock continues to rise in price, the call will become more and more valuable.
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On the other hand, if the stock reverses and falls dramatically, the put will become
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quite valuable. In either case, the opportunity for large potential profits remains.
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Moreover, the investor has improved his risk exposure. The most that the new posi
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tion can lose at expiration is 3 points, since the combination cost 8 points originally,
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and can be sold for 5 points at worst.
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To summarize, if the underlying stock moves up to the ne:t"t strike, the straddle
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buyer should consider rolling his put up, selling the one that he is long and buying
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the one at the next higher striking price. Conversely, if the stock starts out with a
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downward move, he should consider rolling the call down, selling the one that he is
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long and buying the one at the next lower strike. In either case, he reduces his risk
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exposure without limiting his profit potential - exactly the type of follow-up result
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that the straddle buyer should be aiming for.
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BUYING A STRANGLE
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A strangle is a position that consists of both a put and a call, which generally have the
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same expiration date, but different striking prices. The fallowing example depicts a
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strangle.
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Example: One might buy a strangle consisting of an XYZ January 45 put and an XYZ
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January 50 call. Buying such a strangle is quite similar to buying a straddle, although |