35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
332 Part Ill: Put Option Strategies
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so. Thus, the spread would have widened to 8 points. Call bear spreads often do not
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produce a similar result on a short-term downward movement. Since the call spread
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involves being short a call with a lower striking price, this call may actually pick up
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time value premium as the stock falls close to the lower strike. Thus, even though the
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call spread might have a similar profit at expiration, it often will not perform as well
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on a quick downward movement.
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For these two reasons - less chance of early exercise and better profits on a
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short-term movement - the put bear spread is superior to the call bear spread. Some
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investors still prefer to use the call spread, since it is established for a credit and thus
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does not require a cash investment. This is a rather weak reason to avoid the superi
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or put spread and should not be an overriding consideration. Note that the margin
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requirement for a call bear spread will result in a reduction of one's buying power by
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an amount approximately equal to the debit required for a similar put bear spread.
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(The margin required for a call bear spread is the difference between the striking
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prices less the credit received from the spread.) Thus, the only accounts that gain any
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substantial advantage from a credit spread are those that are near the minimum equi
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ty requirement to begin with. For most brokerage firms, the minimum equity
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requirement for spreads is $2,000.
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BULL SPREAD
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A bull spread can be established with put options by buying a put at a lower striking
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price and simultaneously selling a put with a higher striking price. This, again, is the
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same way a bull spread was constructed with calls: selling the higher strike and buy
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ing the lower strike.
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Example: The same prices can be used:
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XYZ common, 55;
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XYZ January 50 put, 2; and
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XYZ January 60 put, 7.
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The bull spread is constructed by buying the January 50 put and selling the January
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60 put. This is a credit spread. The credit is 5 points in this example. If the underly
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ing stock advances by January expiration and is anywhere above 60 at that time, the
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maximum profit potential of the spread will be realized. In that case, with XYZ any
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where above 60, both puts would expire worthless and the spreader would make a
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profit of the entire credit - 5 points in this example. Thus, the maximum profit poten
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tial is limited, and the maximum profit occurs if the underlying stock rises in price |