40 lines
1.8 KiB
Plaintext
40 lines
1.8 KiB
Plaintext
770 Part VI: Measuring and Trading Volatility
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FIGURE 37-4.
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Bull spread profit picture in 30 days.
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1000
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500
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iv=80%
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(/)
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(/)
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0
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0 -' :;:,
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70 801 90 e
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~
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a.
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fl'>
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-500
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130 140
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iv= 20%
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-1000 Stock
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ty is a rather flat thing, sloping only slightly upward - and exhibiting far less risk and
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reward potential than its lower implied volatility counterpart. This points out anoth
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er important fact: For volatile stocks, one cannot expect a 4-rrwnth bull spread to
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expand or contract much during the first rrwnth of life, even if the stock makes a sub
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stantial rrwve. Longer-term spreads have even less movement.
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As a corollary, note that if implied volatility shrinks while the stock rises, the
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profit outlook will improve. Graphically, using Figure 37-4, if one's profit picture
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moves from the 80% curve to the 20% curve on the right-hand side of the chart, that
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is a positive development. Of course, if the stock drops and the implied volatility
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drops too, then one's losses would be worse - witness the left-hand side of the graph
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in Figure 37-4.
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A graph could be drawn that would incorporate other implied volatilities, but
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that would be overkill. The profit graphs of the other spreads from Tables 37-6 or
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37-7 would lie between the two curves shown in Figure 37-4.
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If this discussion had looked at bull spreads as put credit spreads instead of call
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debit spreads, perhaps these conclusions would not have seemed so unusual.
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Experienced option traders already understand much of what has been shown here,
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but less experienced traders may find this information to be different from what they
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expected.
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Some general facts can be drawn about the bull spread strategy. Perhaps the
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most important one is that, if used on a volatile stock, you won't get much expansion
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in the spread even if the stock makes a nice move upward in your favor. In fact, for |