28 lines
1.8 KiB
Plaintext
28 lines
1.8 KiB
Plaintext
220 • The Intelligent Option Investor
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The decision to leave the position open must depend on what other
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potential investments you are able to make and how the stock position that
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will likely be put to you at expiration of the option contract stacks up on a
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relative basis. For instance, let’s assume that you had received a premium
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of $2.50 for writing the puts struck at $50. This gives you an effective buy
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price of $47.50. The stock is now trading at $43 per share, so you can think
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of your position as an unlevered, unrealized loss of $4.50, or a little under
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10 percent of your EBP . Y our new worst-case valuation is $55 per share,
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which implies a gain of about 15 percent on your EBP; your new best-case
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valuation is $65 per share, which implies a gain of 37 percent.
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How do these numbers compare with other investments in your port-
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folio? How much spare capacity does your portfolio have for additional
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investments? (That is, do you have enough spare cash to increase the size
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of this investment by selling more puts at the new market price or buying
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shares of stock? And if so, would your portfolio be weighted too heavily on a
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single industry or sector?) By answering these questions and understanding
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how this presently losing investment compares with other existing or poten-
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tial investments should govern your portfolio management of the position.
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An investor cannot change the price at which he or she transacted
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in a security. The best he or she can do is to develop a rational view of the
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value of a security and judge that security by its relative merit versus other
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possible investments. Whether you ever make an option transaction, this
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is a good rule to keep in mind.
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Let us now take a look at short calls and short-call spreads—the
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strategy used for accepting upside exposure.
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Short Call (Call Spread)
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