35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
318 Part Ill: Put Option Strategies
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call premium, less $200 - the lesser out-of-the-money amount. The call is 2 points
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out-of-the-money and the put is 8 points out-of-the-money. Actually, the true collat
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eral requirement for any write involving both puts and calls - straddle write or stran
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gle write - is the greater of the requirement on the put or the call, plus the amount by
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which the other option is in-the-nwney. The last phrase, the amount by which the
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other option is in-the-money, applies to a situation in which a strangle had been con
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structed by selling two in-the-money options. This is a less popular strategy, since the
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writer generally receives less time value premium by writing two in-the-money
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options. An example of an in-the-money strangle is to sell the January 60 call and the
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January 70 put with the stock at 65.
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FURTHER COMMENTS ON UNCOVERED STRADDLE
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AND STRANGLE WRITING
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When ratio writing was discussed, it was noted that it was a strategy with a high prob
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ability of making a limited profit. Since the straddle write is equivalent to the ratio
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write and the strangle write is equivalent to the variable ratio write, the same state
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ment applies to these strategies. The practitioner of straddle and strangle writing
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must realize, however, that protective follow-up action is mandatory in limiting loss
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es in a very volatile market. There are other techniques that the straddle writer can
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sometimes use to help reduce his risk.
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It has often been mentioned that puts lose their time value premium more
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quickly when they become in-the-money options than calls do. One can often con
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struct a neutral position by writing an extra put or two. That is, if one sells 5 or 6 puts
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and 4 calls 'Ai.th the same terms, he may often have created a more neutral position
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than a straddle write. If the stock moves up and the call picks up time premium in a
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bullish market, the extra puts 'Aill help to offset the negative effect of the calls. On
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the other hand, if the stock drops, the 5 or 6 puts will not hold as much time premi
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um as the 4 calls are losing - again a neutral, standoff position. If the stock begins to
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drop too much, the writer can always balance out the position by selling another call
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or two. The advantage of writing an extra put or two is that it counterbalances the
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straddle writer's most severe enemy: a quick, extremely bullish rise by the underly
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ing stock.
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USING THE DELTAS
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This analysis, that adding an extra short put creates a neutral position, can be sub
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stantiated more rigorously. Recall that a ratio writer or ratio spreader can use the |