60 lines
2.7 KiB
Plaintext
60 lines
2.7 KiB
Plaintext
537
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OPTION TrAdINg STrATegIeS
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in the above example the maximum gain exceeds the maximum risk by a factor of 4 to 1, there is
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a greater probability of a net loss on the trade, since prices must decline by $60/oz before a profit
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is realized.
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In this type of spread, the trader achieves a bearish position at a fairly low premium cost at the
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expense of sacrificing the potential for unlimited gains in the event of a very sharp price decline. This
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strategy might be appropriate for the trader expecting a price decline but viewing the possibility of a
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very large price slide as being very low .
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Strategy 19b: bear Call Money Spread (Short Call with Lower Strike
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price/Long Call with higher Strike price)—Case 2
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example. Buy an August $1,300 gold futures call at a premium of $9.10/oz ($9.10) and simultane-
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ously sell an August $1,200 gold futures call at a premium of $38.80/oz ($3,880), with August gold
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futures trading at $1,200/oz. (See Table 35.19b and Figure 35.19b.)
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Comment. In contrast to the previous strategy, which involved two in-the-money calls, this illustra-
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tion is based on a spread consisting of a short at-the-money call and a long out-of-the-money call.
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In a sense, this type of trade can be thought of as a short at-the-money call position with built-in
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stop-loss protection. (The long out-of-the-money call will serve to limit the risk in the short at-the-
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money call position.) This risk limitation is achieved at the expense of a reduction in the net premium
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received by the seller of the at-the-money call (by an amount equal to the premium paid for the out-
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of-the-money call). This trade-off between risk exposure and the amount of net premium received
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is illustrated in Figure 35.19b, which compares the outright short at-the-money call position to the
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above spread strategy.
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tabLe 35.19b profit/Loss Calculations: bear Call Money Spread (Short Call with Lower Strike price/Long
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Call with higher Strike price); Case 2—Short at-the-Money Call/Long Out-of-the-Money
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Call
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(1) (2) (3) (4) (5) (6) (7) (8)
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Futures price
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at expiration
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($/oz)
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premium of
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august $1,300
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Call ($/oz)
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$ amount
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of premium
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paid
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premium of
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august $1,200
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Call ($/oz)
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$ amount
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of premium
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received
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Value of
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$1,300 Call at
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expiration
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Value of
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$1,200 Call at
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expiration
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profit/Loss on
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position
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[(5) − (3) + (6) − (7)]
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1,000 9.1 $910 38.8 $3,880 $0 $0 $2,970
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1,050 9.1 $910 38.8 $3,880 $0 $0 $2,970
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1,100 9.1 $910 38.8 $3,880 $0 $0 $2,970
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1,150 9.1 $910 38.8 $3,880 $0 $0 $2,970
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1,200 9.1 $910 38.8 $3,880 $0 $0 $2,970
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1,250 9.1 $910 38.8 $3,880 $0 $5,000 –$2,030
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1,300 9.1 $910 38.8 $3,880 $0 $10,000 –$7,030
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1,350 9.1 $910 38.8 $3,880 $5,000 $15,000 –$7,030
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1,400 9.1 $910 38.8 $3,880 $10,000 $20,000 –$7,030 |