36 lines
1.8 KiB
Plaintext
36 lines
1.8 KiB
Plaintext
148
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FIGURE 6-1.
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Ratio write (2: 1 ).
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+$1,300
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C
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0
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e ·5.
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X
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LU
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al
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rn rn
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.3
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0
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-e a.
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Part II: Call Option Strategies
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Stock Price at Expiration
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a 3- or 6-month time period. Consequently, this strategy has a rather high probabili
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ty of making a limited profit. The profit in this example would, of course, be reduced
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by commission costs and margin interest charges if the stock is bought on margin.
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Before discussing the specifics of ratio writing, such as investment required,
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selection criteria, and follow-up action, it may be beneficial to counter two fairly
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common objections to this strategy. The first objection, although not heard as fre
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quently today as when listed options first began trading, is "Why bother to buy 100
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shares of stock and sell 2 calls? You will be naked one call. Why not just sell one
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naked call?" The ratio writing strategy and the naked writing strategy have very little
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in common except that both have upside risk. The profit graph for naked writing
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(Figure 5-1) bears no resemblance to the roof-shaped profit graph for a ratio write
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(Figure 6-1). Clearly, the two strategies are quite different in profit potential and in
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many other respects as well.
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The second objection to ratio writing for the conservative investor is slightly
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more valid. The conservative investor may not feel comfortable with a position that
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has risk if the underlying stock moves up in price. This can be a psychological detri
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ment to ratio writing: When stock prices are rising and everyone who owns stocks is
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happy and making profits, the ratio writer is in danger of losing money. However, in
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a purely strategic sense, one should be willing to assume some upside risk in
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exchange for larger profits if the underlying stock does not rise heavily in price. The |