38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
354 Part Ill: Put Option Strategies
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Even though five criteria have been stated, it is relatively easy to find a position that
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satisfies all five conditions. The strategist may also be able to rely upon technical
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input. If the stock seems to be in a near-term trading range, the position may be more
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attractive, for that would indicate that the chances of the near-term combination
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expiring worthless are enhanced.
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The "calendar straddle" is a strategy that looks deceptively attractive. As the
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reader should know by now, options do not decay in a linear fashion. Instead, options
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tend to hold time value premium until they get quite close to expiration, when the
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time value premium disappears at a fast rate. Consequently, the sale of a near-term
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straddle and the simultaneous purchase of a longer-term straddle often appear to be
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attractive because the debit seems small. Again, certain criteria can be set forth that
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will aid in selecting a reasonably attractive position. The stock should be at or very
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near the striking price when the position is established. Since this is basically a neu
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tral strategy, one that offers the largest potential profits at near-term expiration, one
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should want to sell the most time premium possible. This is why the stock must be
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near the striking price initially. The underlying stock does not have to be a volatile
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one, although volatile stocks will most easily satisfy the next two criteria. The near
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term credit should be at least two-thirds of the longer-term debit. In the example
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used to explain this strategy, the near-term straddle was sold for 5, while the longer
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term straddle was bought for 7 points. Thus, the near-term straddle was worth more
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than two-thirds of the longer-term straddle's price. Finally, the position should be
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established with two to four months remaining until near-term expiration. If positions
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with a longer time remaining are used, there is a significant probability that the
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underlying stock will have moved some distance away from the striking price by the
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time the near-term options expire. Summarizing, the three criteria for a "calendar
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straddle" are:
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1. Stock near striking price initially.
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2. Two to four months remaining until near-term expiration.
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3. Near-term straddle price at least two-thirds of longer-term straddle price.
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The "diagonal butterfly" is the most difficult of these three types of positions to
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locate. Again, one would like the stock to be near the middle striking price when the
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position is established. Also, one would like the underlying stock to be somewhat
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volatile, since there is the possibility that long-term options will be owned for free. If
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this comes to pass, the strategist wants the stock to be capable of a large move in
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order to have a chance of generating large profits. The most restrictive criterion -:
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one that will eliminate all but a few possibilities on a daily basis - is that the near
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term straddle price should be at least one and one-half times that of the longer-term, |