46 lines
1.2 KiB
Plaintext
46 lines
1.2 KiB
Plaintext
24 • The Intelligent Option Investor
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Here an investor is bullish on the prospects of the stock and is tailor -
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ing where to gain and accept exposure by selling a short-term put and
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simultaneously buying a longer-term call. By doing this, the investor
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basically subsidizes the purchase of the call option with the sale of the
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put option, thereby reducing the level the stock needs to exceed on the
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upside before one breaks even. In this case, we’re assuming that the call
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option costs $1.50 and the put option trades for $1.00. The cash inflow
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from the put option partially offsets the cash outflow from the call op-
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tion, so the total breakeven amount is just the call’s $60 strike price plus
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the net of $0.50.
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Effective Buy Price/Effective Sell Price
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One thing that I hope you realized while looking at each of the preceding
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diagrams is how similar each of them looks to a particular part of our long
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and short stock diagrams:
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Buying a stock.
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-
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20
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40
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60
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80
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100
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120
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140
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160
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180
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200
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-
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20
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40
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60
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80
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100
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120
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140
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160
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180
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200
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RED
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GREEN
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GREEN
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RED
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Short selling a stock.
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For example, doesn’t the diagram labeled “Buying a call for growth”
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in the preceding section look just like the top part of the buying stock
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diagram? |