21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
right, he stands to make $660. If he is wrong? Exhibit 5.1 shows how
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Brendan’s calls hold up if they are held until expiration.
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EXHIBIT 5.1 Naked Johnson & Johnson call at expiration.
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Considering the risk/reward of this trade, Brendan is rightfully concerned
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about a big upward move. If the stock begins to rally, he must be prepared
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to act fast. Brendan must have an idea in advance of what his pain threshold
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is. In other words, at what price will he buy back his calls and take a loss if
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Johnson & Johnson moves adversely?
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He decides he will buy all 10 of his calls back at 1.10 per contract if the
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trade goes against him. (1.10 is an arbitrary price used for illustrative
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purposes. The actual price will vary, based on the situation and the risk
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tolerance of the trader. More on when to take profits and losses is discussed
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in future chapters.) He may choose to enter a good-till-canceled (GTC)
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stop-loss order to buy back his calls. Or he may choose to monitor the stock
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and enter the order when he sees the calls offered at 1.10—a mental stop
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order. What Brendan needs to know is: How far can the stock price advance
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before the calls are at 1.10?
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Brendan needs to examine the greeks of this trade to help answer this
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question. Exhibit 5.2 shows the hypothetical greeks for the position in this
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example.
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EXHIBIT 5.2 Greeks for short Johnson & Johnson 65 call (per contract). |