27 lines
2.2 KiB
Plaintext
27 lines
2.2 KiB
Plaintext
\O.,ter 18: Buying Puts in Conjunction with Call Purchases 291
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since when the outright purchase of a call was discussed, it was shown that the
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purchase of an in-the-money call was more conservative than the purchase of an out
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of-the-money call, in general. The same was true for the outright purchase of puts,
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perhaps even more so, because of the smaller time value of an in-the-money put.
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Therefore, the strangle created by the two an in-the-money call and an in-the
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money put - should be more conservative than the out-of-the-money strangle.
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If the underlying stock moves quickly in either direction, the strangle buyer
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may sometimes be able to take action to protect some of his profits. He would do so
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in a manner similar to that described for the straddle buyer. For example, if the stock
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moved up quickly, he could sell the put that he originally bought and buy the put at
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the next higher striking price in its place. If he had started from an out-of-the-money
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strangle position, this would then place him in a straddle. The strategist should not
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blindly take this sort of follow-up action, however. It may be overly expensive to "roll
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up" the put in such a manner, depending on the amount of time that has passed and
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the actual option prices involved. Therefore, it is best to analyze each situation on a
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case-by-case basis to see whether it is logical to take any follow-up action at all.
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As a final point, the out-of-the-money strangles may appear deceptively cheap,
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both options selling for fractions of a point as expiration nears. However, the proba
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bility of realizing the maximum loss equal to one's initial investment is fairly large
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with strangles. This is distinctly different from straddle purchases, whereby the prob
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ability of losing the entire investment is small. The aggressive speculator should not
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place a large portion of his funds in out-of-the-money strangle purchases. The per
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centage risk is smaller with the in-the-money strangle, being equal to the amount of
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time value premium paid for the options initially, but commission costs will be some
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what larger. In either case, the underlying stock still needs to move by a relatively
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large amount in order for the buyer to profit. |