35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
Chapter 23: Spreads Combining Calls and Puts 339
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COMBINING AN OPTION PURCHASE AND A SPREAD
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It is possible to combine the purchase of a call and a credit put spread to produce a
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position that behaves much like a call buy, although it has less risk over much of the
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profit range. This strategy is often used when one has a quite bullish opinion regard
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ing the underlying security, yet the call one wishes to purchase is "overpriced." In a
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similar manner, if one is bearish on the underlying, he can sometimes combine the
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purchase of a put with the sale of a call credit spread. Both approaches are described
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in this section.
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THE BULLISH SCENARIO
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It sometimes happens that one arrives at a bullish opinion regarding a stock, only to
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find that the options are very expensive. In fact, they may be so expensive as to pre
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clude thoughts of making an outright call purchase. This might happen, for example,
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if the stock has suddenly plummeted in price (perhaps during an ongoing, rapid bear
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ish move by the overall stock market). To buy calls at this time would be overly risky.
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If the underlying began to rally, it would often be the case that the implied volatility
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of the calls would shrink, thus harming one's long call position.
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As a counter to this, it might make sense to buy the call, but at the same time
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to sell a put credit spread. Recall that a put credit spread is a bullish strategy.
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Moreover, since it is presumed that the options are expensive on this particular stock,
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the puts being used in the spread would be expensive as well. Thus, the credit
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received from the spread would be slightly larger than "normal" because the options
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are expensive.
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Example: XYZ is selling at 100. One wishes to purchase the December 100 call as an
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outright bullish speculation. That call is selling for 10. However, one determines that
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the December 100 call is overpriced at these levels. (In order to make this determi
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nation, one would use an option model whose techniques are described in Chapter
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28 on mathematical applications.) Hence, he decides to use the following put spread
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in addition to buying the December 100 call:
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Sell December 90 put, 6
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Buy December 80 put, 3
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The sale of the put spread brings in a 3-point credit. Thus, his total expenditure for
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the entire position is 7 points ( 10 for the December 100 call, less 3 credit from the sale
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of the put spread). If one is correct about his bullish outlook for the stock (i.e., the
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stock goes up), he can in some sense consider that he paid 7 for the call. Another way |