22 lines
1.1 KiB
Plaintext
22 lines
1.1 KiB
Plaintext
240 • The Intelligent Option Investor
|
||
Notice that there is much less leverage on the long-put side than on
|
||
the long-call side. This is a function of the volatility smile and the abnor -
|
||
mally high pricing on the far OTM put side. It turns out that the $20-strike
|
||
puts have an implied volatility of 43.3 percent compared to an ATM im-
|
||
plied volatility of 22.0 percent.
|
||
Obviously, the lower level of leverage will make closing before expira-
|
||
tion less attractive, so it is important to select a put strike price between the
|
||
present market price and your worst-case fair value estimate. In this way,
|
||
if the option does expire when the stock is at that level, you will at least be
|
||
able to realize the profit of the intrinsic value.
|
||
With these explanations of the primary mixed-exposure strategies,
|
||
now let’s turn to overlays—where an option position is added to a stock
|
||
position to alter the risk-return characteristics of the investor’s portfolio.
|
||
Covered Call
|
||
Contingent Upside Exposure
|
||
Contingent Downside Exposure
|
||
LIGHT GREEN
|
||
RED
|
||
LIGHT RED
|
||
Downside: Overvalued
|
||
Upside: Fairly valued or undervalued |