42 lines
2.0 KiB
Plaintext
42 lines
2.0 KiB
Plaintext
Cltapter 17: Put Buying in Conjunction with Common Stock Ownership
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TABLE 17-3.
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Highest Call Strike That Pays for an At-the-Money Put
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(Assuming 2.5 years to expiration)
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Volatility Coll Strike
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30%
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40%
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50%
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70%
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100%
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of Underlying
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30% out of money
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35% out of money
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40% out of money
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50% out of money
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70% out of money
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279
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same price as a three-year call struck at 200! That may seem illogical, but the figures
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can be checked out with the aid of an option-pricing model. Thus, this company was
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able to hedge all of its CSCO stock, with no downside risk ( the striking price of the
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puts was the same as the current stock price) and still had profit potential of over 50%
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to the upside over the next three years.
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Thus, one should consider using LEAPS options when he establishes a collar -
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even ifhe is not an institutional trader - because the striking price of the calls can be
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quite high in comparison to that of the put' s strike or in comparison to the price of
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the underlying stock. Table 17-3 shows how far out-of-the-money a written call could
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be that still covers the cost of buying an at-the-money put. The time to expiration in
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this table is 2.5 years - the longest term listed option that currently exists as a LEAPS
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option.
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USING LOWER STRIKES AS A PARTIAL COVERED WRITE
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It should also be pointed out that one does not necessarily have to forsake all of
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the profit potential from his stock. He might buy the puts, as usual, and then sell calls
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with a somewhat lower strike than needed for a low-cost collar, but the quantity of
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calls sold would be less than that of stock owned. In that way, there would be unlim
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ited profit potential on some of the shares of the underlying stock.
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Example: Suppose that the following prices exist:
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XYZ:61
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Apr 55 put: 1
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Apr 65 call: 2
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Furthermore, suppose that one owns 1000 shares of XYZ. Thus, the purchase
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of 10 Apr 55 puts at 1 point apiece would protect the downside. In order to cover the
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cost of those puts ($1000), one need only sell five of the Apr 65 calls at 2 points |