30 lines
1.4 KiB
Plaintext
30 lines
1.4 KiB
Plaintext
Gapter 4: Other Call Buying Strategies 131
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FIGURE 4-3.
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Reverse hedge using two strikes (simulated combination purchase).
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C:
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~ ·5.
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in
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~
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l/l
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.3
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0
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i.l::-$350
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e a.
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SUMMARY
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40
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Stock Price at Expiration
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The strategies described in this chapter would not normally be used if the underly
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ing stock has listed put options. However, if no puts exist, or the puts are very illiq
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uid, and the strategist feels that a volatile stock could move a relatively large distance
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in either direction during the life of a call option, he should consider using one of the
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forms of the reverse hedge strategy - shorting a quantity of stock and buying calls on
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more shares than he is short. If the desired movement does develop, potentially large
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profits could result. In any case, the loss is limited to a fixed amount, generally
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around 20 to 30% of the initial investment. Although it is possible to take follow-up
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action to lock in small profits and attempt to gain on a reversal by the stock, it is wiser
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to let the position run its course to capitalize on those occasions when the profits
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become large. Normally a 2:1 ratio (long 2 calls, short 100 shares of stock) is used in
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this strategy, but this ratio can be adjusted if the investor wants to be more bullish or
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more bearish. If the stock is initially between two striking prices, a neutral profit
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range can be set up by shorting the stock and buying calls at both the next higher
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strike and the next lower strike. |