35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
t,r 20: The Sale ol a Straddle 305
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now rolls the entire straddle - rolling down for protection, rolling up for an
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ease in profit potential, and rolling forward when the time value premium of the
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die dissipates. Rolling up or down would probably involve debits, unless one
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led to a longer maturity.
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Some writers might prefer to make a slight adjustment to the covered straddle
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ting strategy. Instead of selling the put and call at the same price, they prefer to
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ell an out-of-the-money put against the covered call write. That is, if one is buying
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XYZ at 50 and selling the call, he might then also sell a put at 45. This would increase
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his upside profit potential and would allow for the possibility of both options expir
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ing worthless if XYZ were anywhere between 45 and 50 at expiration. Such action
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would, of course, increase the potential dollars of risk if XYZ fell below 45 by expira
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tion, but the writer could always roll the call down to obtain additional downside pro
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tection.
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One final point should be made with regard to this strategy. The covered call
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writer who is writing on margin and is fully utilizing his borrowing power for call writ
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ing will have to add additional collateral in order to write covered straddles. This is
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because the put write is uncovered. However, the covered call writer who is operat
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ing on a cash basis can switch to the covered straddle writing strategy without put
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ting up additional funds. He merely needs to move his stock to a margin account and
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use the collateral value of the stock he already owns in order to sell the puts neces
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sary to implement the covered straddle writes.
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THE UNCOVERED STRADDLE WRITE
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In an uncovered straddle write, one sells the straddle without owning the underlying
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stock. In broad terms, this is a neutral strategy with limited profit potential and large
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risk potential. However, the probability of making a profit is generally quite large,
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and methods can be implemented to reduce the risks of the strategy.
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Since one is selling both a put and a call in this strategy, he is initially taking in
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large amounts of time value premium. If the underlying stock is relatively unchanged
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at expiration, the straddle writer will be able to buy the straddle back for its intrinsic
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value, which would normally leave him with a profit.
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Example: The following prices exist:
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XYZ common, 45;
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XYZ January 45 call, 4; and
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XYZ January 45 put, 3. |