34 lines
2.5 KiB
Plaintext
34 lines
2.5 KiB
Plaintext
34 Part I: Basic Properties of Stock Options
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option continues to decline through 2 - 1.90, 1.80, 1.70, and so on - without ~
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ever regaining the 2 level, then the broker's hands are tied. He may not execute
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what is now a limit order unless the call trades at 2.
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Good-Until-Canceled Order. A limit, stop, or stop-limit order may be des
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ignated "good until canceled." If the conditions for the order execution do not
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occur, the order remains valid for 6 months without renewal by the customer.
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Customers using an on-line broker will not be able to enter "market not held"
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orders, and may not be able to use stop orders or good-until-canceled orders either,
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depending on the brokerage firm.
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PROFITS AND PROFIT GRAPHS
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A visual presentation of the profit potential of any position is important to the over
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all understanding and evaluation of it. In option trading, the many multi-security
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positions especially warrant strict analysis: stock versus options (as in covered or ratio
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writing) or options versus options (as in spreads). Some strategists prefer a table list
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ing the outcomes of a particular strategy for the stock at various prices; others think
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the strategy is more clearly demonstrated by a graph. In the rest of the text, both a
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table and a graph will be presented for each new strategy discussed.
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Example: A customer wishes to evaluate the purchase of a call option. The potential
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profits or losses of a purchase of an XYZ July 50 call at 4 can be arrayed in either a
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table or a graph of outcomes at expiration. Both Table 1-5 and Figure 1-5 depict the
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same information; the graph is merely the line representing the column marked
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"Profit or Loss" in the table. The vertical axis represents dollars of profit or loss, and
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the horizontal axis shows the stock price at expiration. In this case, the dollars of prof
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it and the stock price are at the expiration date. Often, the strategist wants to deter
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mine what the potential profits and losses will be before expiration, rather than at the
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expiration date itself. Tables and graphs lend themselves well to the necessary analy
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sis, as will be seen in detail in various places later on.
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In practice, such an example is too simple to require a table or a graph - cer
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tainly not both - to evaluate the potential profits and losses of a simple call purchase
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held to expiration. However, as more complex strategies are discussed, these tools
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become ever more useful for quickly determining such things as when a position
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makes money and when it loses, or how fast one's risk increases at certain stock
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prices. |