36 lines
1.7 KiB
Plaintext
36 lines
1.7 KiB
Plaintext
188
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FIGURE 8-1.
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Bear spread •
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. § +$200
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"it! -~
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w
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CJ) 30 ig
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..J
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0
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:!:
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e a. -$300
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Part II: Call Option Strategies
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Stock Price at Expiration
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The break-even point, maximum profit potential, and investment required are
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all quite simple computations for a bear spread.
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Maximum profit potential== Net credit received
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Break-even point== Lower striking price + Amount of credit
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Maximum Collateral investment = = risk required
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Difference in
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striking prices
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Credit + Commissions received
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In the example above, the net credit received from the sale of the October 30
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call at 3 and the purchase of the October 35 call at 1 was two points. This is the max
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imum profit potential. The break-even point is then easily computed as the lower
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striking price, 30, plus the amount of the credit, 2, or 32. The risk is equal to the
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investment. It is the difference between the striking prices - 5 points - less the net
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credit received - 2 points - for a total investment of 3 points plus commissions. Since
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this spread involves a call that is not "covered" by a long call with a striking price
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equal to or lower than that of the short call, some brokerage firms may require a
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higher maintenance requirement per spread than would be required for a bull
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spread. Again, since a spread must be done in a margin account, most brokerage
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firms require that a minimum amount of equity be in the account as well.
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Since this is a credit spread, the investor does not really "spend" any dollars to
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establish the spread. The investment is really a reduction in the buying power of the
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customer's margin account, but it does not actually require dollars to be spent when
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the transaction is initiated. |