34 lines
2.3 KiB
Plaintext
34 lines
2.3 KiB
Plaintext
66 Part II: Call Option Strategies
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debit rather than let their "untouchable" stock be called away, just before the stock
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itself or the stock market collapsed.
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One should be very cautious about writing covered calls against stocks that he
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doesn't intend to sell. If one feels that he cannot sell his stock, for whatever reason -
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tax considerations, emotional ties, etc. - he really should not sell covered calls against
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it. Perhaps buying a protective put ( discussed in a later chapter) would be a better
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strategy for such a stockholder.
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DIVERSIFYING RETURN AND PROTECTION
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IN A COVERED WRITE
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FUNDAMENTAL DIVERSIFICATION TECHNIQUES
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Quite clearly, the covered writing strategist would like to have as much of a combina
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tion of high potential returns and adequate downside protection as he can obtain.
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Writing an out-of-the-money call will offer higher returns if exercised, but it usually
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affords only a modest amount of downside protection. On the other hand, writing an
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in-the-money call will provide more downside cushion but offers a lower return if
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exercised. For some strategists, this diversification is realized in practice by writing
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out-of-the-money calls on some stocks and in-the-moneys on other stocks. There is no
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guarantee that writing in this manner on a list of diversified stocks will produce supe
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rior results. One is still forced to pick the stocks that he expects will perform better
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(for out-of-the-money writing), and that is difficult to do. Moreover, the individual
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investor may not have enough funds available to diversify into many such situations.
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There is, however, another alternative to obtaining diversification of both returns and
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downside protection in a covered writing situation.
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The writer may often do best by writing half of his position against in-the-rrwn
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eys and half against out-of the-rrwneys on the same stock. This is especially attractive
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for a stock whose out-of-the-money calls do not appear to provide enough downside
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protection, and at the same time, whose in-the-money calls do not provide quite
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enough return. By writing both options, the writer may be able to acquire the return
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and protection diversification that he is seeking.
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Example: The following prices exist for 6-month calls:
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XYZ common stock, 42;
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XYZ April 40 call, 4; and
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XYZ April 45 call, 2. |