33 lines
2.0 KiB
Plaintext
33 lines
2.0 KiB
Plaintext
Covered Put
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The last position in the family of basic volatility-selling strategies is the
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covered put, sometimes referred to as selling puts and stock. In a covered
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put, a trader sells both puts and stock on a one-to-one basis. The term
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covered put is a bit of a misnomer, as the strategy changes from limited risk
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to unlimited risk when short stock is added to the short put. A naked put can
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produce only losses until the stock goes to zero—still a substantial loss.
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Adding short stock means that above the strike gains on the put are limited,
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while losses on the stock are unlimited. The covered put functions very
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much like a naked call. In fact, they are synthetically equal. This concept
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will be addressed further in the next chapter.
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Let’s looks at another trader, Libby. Libby is an active trader who trades
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several positions at once. Libby believes the overall market is in a range
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and will continue as such over the next few weeks. She currently holds a
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short stock position of 1,000 shares in Harley-Davidson. She is becoming
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more neutral on the stock and would consider buying in her short if the
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market dipped. She may consider entering into a covered-put position.
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There is one caveat: Libby is leaving for a cruise in two weeks and does not
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want to carry any positions while she is away. She decides she will sell the
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covered put and actively manage the trade until her vacation. Libby will sell
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10 Harley-Davidson March (22-day) 70 puts at 1.85 against her short 1,000
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shares of Harley-Davidson, which is trading at $69 per share.
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She knows that her maximum profit if the stock declines and assignment
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occurs will be $850. That’s 0.85 × $100 × 10 contracts. Win or lose, she
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will close the position in two weeks when there are only eight days until
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expiration. To trade this covered put she needs to watch her greeks.
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Exhibit 5.10 shows the greeks for the Harley-Davidson 70-strike covered
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put.
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EXHIBIT 5.10 Greeks for Harley-Davidson covered put (per contract).
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Delta −0.419
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Gamma−0.106
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Theta 0.031
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Vega −0.066 |