34 lines
1.6 KiB
Plaintext
34 lines
1.6 KiB
Plaintext
284
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FIGURE 18-1.
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Straddle purchase.
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C:
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.Q
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I!! ·a.
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X
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w
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ro $0 en en 0
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..J
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0
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-e a..
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-$500
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Part Ill: Put Option Strategies
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Stock Price at Expiration
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chase is superior to the reverse hedge, however, and where listed puts exist on a stock,
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the reverse hedge strategy becomes obsolete. The reasons that the straddle purchase
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is superior are that dividends are not paid by the holder and that commission costs
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are much smaller in the straddle situation.
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REVERSE HEDGE WITH PUTS
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A third strategy is equivalent to both the straddle purchase and the reverse hedge.
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It consists of buying the underlying stock and buying two put options. If the stock
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rises substantially in price, large profits will accrue, for the stock profit will more
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than offset the fixed loss on the purchase of two put options. If the stock declines in
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price by a large amount, profits will also be generated. In a decline, the profits gen
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erated by 2 long puts will more than offset the loss on 100 shares of long stock. This
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form of the straddle purchase has limited risk as well. The worst case would occur
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if the stock were exactly at the striking price of the puts at their expiration date - the
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puts would both expire worthless. The risk is limited, percentagevvise and dollar
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wise, since the cost of two put options would normally be a relatively small per
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centage of the total cost of buying the stock. Furthermore, the investor may receive
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some dividends if the underlying stock is a dividend-paying stock. Buying stock and
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buying two puts is superior to the reverse hedge strategy, but is still inferior to the
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straddle purchase. |