44 lines
1.9 KiB
Plaintext
44 lines
1.9 KiB
Plaintext
50 Part II: Call Option Strategies
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the written call would expire totally worthless and the writer might then write anoth
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er call on the same stock. Later, we discuss the subject of continuing to write against
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stocks already owned. It will be seen that in many cases, it is advantageous to con
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tinue to hold a stock and write against it again, rather than to sell it and establish a
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covered write in a new stock.
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TABLE 2-6.
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Downside break-even point-cash account.
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Net investment
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Less dividends
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Total stock cost to expiration
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Divide by shares held
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Break-even price
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$20,380
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500
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$19,880
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+ 500
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39.8
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Next, we translate the break-even price into percent downside protection
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(Table 2-7), which is a convenient way of comparing the levels of downside protec
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tion among variously priced stocks. We will see later that it is actually better to com
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pare the downside protection with the volatility of the underlying stock. However,
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since percent downside protection is a common and widely accepted method that is
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more readily calculated, it is necessary to be familiar with it as well.
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Before moving on to discuss what kinds of returns one should attempt to strive
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for in which situati_ons, the same example will be worked through again for a covered
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write in a margin account. The use of margin will provide higher potential returns,
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since the net investment will be smaller. However, the margin interest charge
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incurred on the debit balance (the amount of money borrowed from the brokerage
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firm) will cause the break-even point to be higher, thus slightly reducing the amount
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of downside protection available from writing the call. Again, all commissions to
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establish the position are included in the net investment computation.
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TABLE 2-7.
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Percent downside protection-cash account.
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Initial stock price
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Less break-even price
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Points of protection
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Divide by original stock price
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Equals percent downside protection
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43
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-39.8
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3.2
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+43
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7.4% |