Files
ollama-model-training-5060ti/training_data/curated/text/ad08cc9200de4dd90aa01a2fa7063ed984828d201059a43c106fbbb9c6270e18.txt

38 lines
2.4 KiB
Plaintext
Raw Blame History

This file contains invisible Unicode characters
This file contains invisible Unicode characters that are indistinguishable to humans but may be processed differently by a computer. If you think that this is intentional, you can safely ignore this warning. Use the Escape button to reveal them.
104 Part II: Call Option Strategies
NVS: 40 VVS: 40
NVS July 40 call: 2 VVS July 40 call: 4
If these two calls are ranked for buying purposes, based strictly on a percentage
change in the underlying stock, the NVS call will appear to be the better buy. For
example, one might see a list such as "best call buys if the underlying stock advances
by 10%." In this example, if each stock advanced 10% by expiration, both NVS and
WS would be at 44. Thus, the NVS July 40 would be worth 4, having doubled in
price, for a 100% potential profit. Meanwhile, the WS July 40 would be worth 4 also,
for a 0% profit to the call buyer. This analysis would lead one to believe that the NVS
July 40 is the better buy. Such a conclusion may be wrong, because an incorrect
assumption was made in the ranking of the potentials of the two stocks. It is not right
to assume that both stocks have the same probability of moving 10% by expiration.
Certainly, the volatile stock has a much better chance of advancing by 10% ( or more)
than the nonvolatile stock does. Any ranking based on equal percentage changes in
the underlying stock, without regard for their volatilities, is useless and should be
avoided.
The correct method of comparing these two July 40 calls is to utilize the actual
volatilities of the underlying stocks. Suppose that it is known that the volatile stock,
WS, could expect to move 15% in the time to July expiration. The nonvolatile stock,
NVS, however, could only expect a move of 5% in the same period. Using this infor­
mation, the call buyer can arrive at the conclusion that WS July 40 is the better call
to buy:
Stock Price in July
VVS: 46 (up 15%)
NVS: 42 (up 5%)
Coll Price
VVS July 40: 6 (up 50%)
NVS July 40: 2 (unchanged)
By assuming that each stock can rise in accordance with its volatility, we can see that
the WS July 40 has the better reward potential, despite the fact that it was twice as
expensive to begin with. This method of analysis is much more realistic.
One more refinement needs to be made in this ranking process. Since most call
purchases are made for holding periods of from 30 to 90 days, it is not correct to
assume that the calls will be held to expiration. That is, even if one buys a 6-month
call, he will normally liquidate it, to take profits or cut losses, in 1 to 3 months. The
call buyer's list should thus be based on how the call will peiform if held for a realis­
tic time period, such as 90 days.