24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Gaining Exposure • 209
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The total premium of $2.16 represents 24 percent of the stock’s price, which
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means that if the implied volatility (around 60 percent) remains constant,
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the stock would have to move 24 percent before an investor even breaks
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even. It is true that during sudden downward stock price moves, implied
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volatility usually rises, so it might take a little less of a stock price move-
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ment to the downside to break even. However, during sudden upside
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moves, implied volatility often drops, which would make it more difficult
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to break even to the upside.
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Despite this expense, a straddle will still give an investor a lower
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breakeven point than a strangle on the same stock if held to expiration.
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The key is that a strangle will almost always generate a higher profit than
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a straddle if it is closed before expiration simply because the initial cost of
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the strangle is lower and the relative leverage of each of its legs is higher.
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This is yet another reason to consider closing a strangle early if and when
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you are pleased with the profits made.
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If you do not know whether a stock will move up or down, the best
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you can hope for is to make a speculative bet on the company. When you
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make speculative bets, it is best to reduce the amount spent on it or you will
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whittle down all your capital on what amounts to a roulette wheel. Reduc-
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ing the amount spent on a single bet is the reason an intelligent investor
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should stay away from straddles.
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With all the main strategies for gaining exposure covered, let’s now
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turn to accepting exposure by selling options. |