39 lines
1.5 KiB
Plaintext
39 lines
1.5 KiB
Plaintext
16 • The Intelligent Option Investor
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It is important to note that a stock does not have to cross this line for
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your option investment to be profitable. We will discuss this dynamic in
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Chapter 2 when we learn more about the time value of options.
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Visual Representation of Put Options
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Now that you understand the conventions we use for our diagrams, let’s
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think about how we might represent the other type of option, dealing with
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downside exposure—the put. First, let’s assume that we want to gain expo-
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sure to the downside potential of a stock. Graphically, we would represent
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this in the following way:
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5/18/2012
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-
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20
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40
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60
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80
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100
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120
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140
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160
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180
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200
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5/20/2013 249 499
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Date/Day Count
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Stock Price
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749 999
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GREEN
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First, notice that, in contrast to the diagram of the call option, the
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directional exposure of a put option is bounded on the downside by $0,
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so we do not draw an arrow indicating infinite exposure. This is the same
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downside exposure of a stock because a stock cannot fall below zero dollars
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per share.
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In this diagram, the time range for the put option is the same 500 days
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as for our call option, but the price range at which we have exposure starts
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at a strike price of $50—the current market price of the stock—making this
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an at-the-money (ATM) put. If you think about moneyness in terms of a
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range of exposure, the difference between out of the money (OTM) and in
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the money (ITM) becomes easy and sensible. Here are examples of differ-
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ent moneyness cases for put options: |