34 lines
2.4 KiB
Plaintext
34 lines
2.4 KiB
Plaintext
168 Part II: Call Option Strategies
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position. However, the position has naked options on both sides, and therefore has
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tremendous liability.
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In practice, professionals watch more than just the delta; they also watch other
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measures of the risk of a position. Even then, price and volatility changes can cause
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problems. Advanced risk concepts are addressed more fully in the chapter on
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Advanced Concepts.
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SUMMARY
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Ratio writing is a viable, neutral strategy that can be employed with differing levels
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of sophistication. The initial ratio of short calls to long stock can be selected simplis
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tically by comparing one's opinion for the underlying stock with projected break-even
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points from the position. In a more sophisticated manner, the delta of the written
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calls can be used to determine the ratio.
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Since the strategy has potentially large losses either to the upside or the down
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side, follow-up action is mandatory. This action can be taken by simple methods such
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as rolling up or down in a constant ratio, or by placing stop orders on the underlying
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stock. A more sophisticated technique involves using the delta of the option to either
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adjust the stock position or roll to another call. By using the delta, a theoretically neu
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tral position can be maintained at all times.
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Ratio writing is a relatively sophisticated strategy that involves selling naked
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calls. It is therefore not suitable for all investors. Its attractiveness lies in the fact that
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vast quantities of time value premium are sold and the strategy is profitable for the
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most probable price outcomes of the underlying stock. It has a relatively large prob
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ability of making a limited profit, if the position can be held until expiration without
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frequent adjustment.
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AN INTRODUCTION TO CALL SPREAD STRATEGIES
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A spread is a transaction in which one simultaneously buys one option and sells
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another option, with different terms, on the same underlying security. In a call
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spread, the options are all calls. The basic idea behind spreading is that the strategist
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is using the sale of one call to reduce the risk of buying another call. The short call in
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a spread is considered covered, for margin purposes, only if the long call has an expi
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ration date equal to or longer than the short call. Before delving into the individual
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types of spreads, it may be beneficial to cover some general facts that pertain to most
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spread situations. |