38 lines
1.9 KiB
Plaintext
38 lines
1.9 KiB
Plaintext
360
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FIGURE 24-1.
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Ratio put spread.
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+$500
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C:
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0
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~ ·5.
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X
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w
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iil
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(/) $0 (/)
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0 ....I
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0
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e a.
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Part Ill: Put Option Strategies
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Stock Price at Expiration
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price, plus the premium, minus the amount by which the option is out-of-the-money,
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the actual dollar requirement in this example would be $700 (20% of $5,000, plus the
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$200 premium, minus the $500 by which the January 45 put is out-of-the-money). As
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with all types of naked writing positions, the strategist should allow enough collater
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al for an adverse stock move to occur. This will allow enough room for stock move
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ment without forcing early liquidation of the position due to a margin call. If, in this
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example, the strategist felt that he might stay with the position until the stock
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declined to 39, he should allow $1,380 in collateral (20% of $3,900 plus the $600 in
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the-money amount).
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The ratio put spread is generally most attractive when the underlying stock is
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initially between the two striking prices. That is, if XYZ were somewhere between 45
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and 50, one might find the ratio put spread used in the example attractive. If the
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stock is initially below the lower striking price, a ratio put spread is not as attractive,
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since the stock is already too close to the downside risk point. Alternatively, if the
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stock is too far above the striking price of the written calls, one would normally have
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to pay a large debit to establish the position. Although one could eliminate the debit
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by writing four or five short options to each put bought, large ratios have extraordi
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narily large downside risk and are therefore very aggressive.
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Follow-up action is rather simple in the ratio put spread. There is very little that
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one need do, except for closing the position if the stock breaks below the downside
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break-even point. Since put options tend to lose time value premium rather quickly
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after they become in-the-money options, there is not normally an opportunity to roll |