33 lines
2.4 KiB
Plaintext
33 lines
2.4 KiB
Plaintext
Cl,apter 6: Ratio Call Writing 153
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one is more bearish on the underlying stock, he can write in-the-money calls in a 2:1
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ratio.
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There is another way to produce a slightly more bullish or bearish ratio write.
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This is to change the ratio of calls written to stock purchased. This method is also
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used to construct a neutral profit range when the stock is not close to a striking price.
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Example: An investor is slightly bearishly inclined in his outlook for the underlying
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stock, so he might write more than two calls for each 100 shares of stock purchased.
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His position might be to buy 100 XYZ at 49 and sell 3 XYZ October 50 calls at 6 points
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each. This position breaks even at 31 on the downside, because if the stock dropped
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by 18 points at expiration, the call profits would amount to 18 points and would pro
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duce a break-even situation. To the upside, the break-even point lies at 59½ for the
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stock at expiration. Each call would be worth 9½ at expiration with the stock at 59½,
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and each call would thus lose 3½ points, for a total loss of 10½ points on the three
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calls. However, XYZ would have risen from 49 to 59½ - a 10½-point gain - therefore
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producing a break-even situation. Again, a formula is available to aid in determining
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the break-even point for any ratio.
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Maximum profit= (Striking price - Stock price) x Round lots
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purchased+ Number of calls written x Call price
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D •d b ak Striking Maximum profit owns1 e re -even = - ------~~----price Number of round lots purchased
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U .d b ak Striking Maximum profit psi e re -even = + price ( Calls written - Round lots purchased)
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Note that in the case of a 2:1 ratio write, where the number of round lots purchased
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equals 1 and the number of calls written equals 2, these formulae reduce to the ones
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given earlier for the more common 2:1 ratio write. To verify that the formulae above
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are correct, insert the numbers from the most recent example.
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Example: Three XYZ October 50 calls at a price of 6 were sold against the purchase
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of 100 XYZ at 49. The number of round lots purchased is 1.
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Maximum profit = (50 - 49) x 1 + 3 x 6 = 19
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Downside break-even= 50-19/1 = 31
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Upside break-even= 50 + 19/(3 1) = 59½
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In the 2:1 ratio writing example given earlier, the break-even points were 37 and 63.
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The 3:1 write has lower break-even points of 31 and 59½, reflecting the more bear
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ish posture on the underlying stock. |