29 lines
1.6 KiB
Plaintext
29 lines
1.6 KiB
Plaintext
Mixing Exposure • 261
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this way, we have locked in a worst possible gain of 11.4 percent and a best
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possible gain of 20.5 percent for the next five and a half months.
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Let’s look at another collar with a different profit and loss profile:
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Collar 2: 78 Days to Expiration
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Strike Price ($) Bid (Ask) Price ($)
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Sold call 70 0.52
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Purchased put 62.50 (1.55)
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Net debit (1.03)
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This collar yields the following best- and worst-case ESPs and corresponding
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returns (assuming a $55 buy price):
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ESP ($) Return (%)
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Best case 68.97 25.4
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Worst case 61.47 11.8
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This shows a shorter-tenor collar—about two and a half months be-
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fore expiration—that allows for more room for capital gains. This might be
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the strategy of a hedge fund manager who is long the stock and uncertain
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about the next quarterly earnings report. For his or her own business rea-
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sons, the manager does not want to show an unrealized loss in case Qual-
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comm’s report is not good, but he or she also doesn’t want to restrict the
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potential capital gains much either.
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Calculating the ESPs and the returns in the same way as described
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here, we get a guaranteed profit range from around 12 to over 25 percent.
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One thing to note as well is that the protection is provided by a put, and
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a put option can be sold any time before expiry to generate a cash inflow
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from time value. Let’s say then that when Qualcomm reports its quarterly
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earnings, the stock price drops to $61—a mild drop that the hedge fund
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manager considers a positive sign. Now that the manager is less worried
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about the downside exposure, he or she can sell the put for a profit. |