35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
196 Part II: Call Option Strategies
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continue to hold the long call. This can become disastrous if the breakout fails and
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the stock drops, possibly resulting in losses far in excess of the original debit.
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Therefore, this action cannot be considered anything but extremely aggressive and
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illogical for the neutral strategist.
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If a breakout does not occur, the spreader will normally be making unrealized
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profits as time passes. Should this be the case, he may want to set some mental stop
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out points for himself. For example, if the underlying stock is quite close to the strik
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ing price with only two weeks to go, there will be some more profit potential left in
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the spread, but the spreader should be ready to close the position quickly if the stock
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begins to get too far away from the striking price. In this manner, he can leave room
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for more profits to accrue, but he is also attempting to protect the profits that have
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already built up. This is somewhat similar to the action that the ratio writer takes
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when he narrows the range of his action points as more and more time passes.
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THE BULLISH CALENDAR SPREAD
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A less neutral and more bullish type of calendar spread is preferred by the more
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aggressive investor. In a bullish calendar spread, one sells the near-term call and buys
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a longer-term call, but he does this when the underlying stock is some distance below
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the striking price of the calls. This type of position has the attractive features of low
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dollar investment and large potential profits. Of course, there is risk involved as well.
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Example: One might set up a bullish calendar spread in the following manner:
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XYZ common, 45;
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sell the XYZ April 50 for l; and
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buy the XYZ July 50 for 1 ½.
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This investor ideally wants two things to happen. First, he would like the near
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term call to expire worthless. That is why the bullish calendar spread is established
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with out-of-the-money calls: to increase the chances of the short call expiring worth
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less. If this happens, the investor will then own the longer-term call at a net cost of
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his original debit. In this example, his original debit was only ½ of a point to create
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the spread. If the April 50 call expires worthless, the investor will own the July 50 call
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at a net cost of ½ point, plus commissions.
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The investor now needs a second criterion to be fulfilled: The stock must rise in
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price by the time the July 50 call expires. In this example, even if XYZ were to rally
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to only 52 between April and July, the July 50 call could be sold for at least 2 points.
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This represents a substantial percentage gain, because the cost of the call has been |