37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
Cl,opter 16:PutOptionBuying
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LOSS-LIMITING ACTIONS
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267
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The foregoing discussion concentrated on how the put holder could retain or
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increase his profit. However, it is often the case in option buying that the holder of
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the option is faced with an unrealized loss. The put holder may also have several
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choices of action to take in this case. His first, and simplest, course of action would
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be to sell the put and take his loss. Although this is advisable in certain cases, espe
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cially when the underlying stock seems to have assumed a distinctly bullish stance, it
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is not always the wisest thing to do. The put holder who has a loss may also consider
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either "rolling up" to create a bearish spread or entering into a calendar spread.
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Either of these actions could help him recover part or all of his loss.
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THE "ROLLING-UP" STRATEGY
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The reader may recall that a similar action to "rolling up," termed "rolling down," was
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available for call options held at a loss and was described in Chapter 3. The put buyer
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who owns a put at a loss may be able to create a spread that allows him to break even
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at a more favorable price at expiration. Such action will inevitably limit his profit
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potential, but is generally useful in recovering something from a put that might oth
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erwise expire totally worthless.
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Example: An investor initially purchases an XYZ October 45 put for 3 points when
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the underlying stock is at 45. However, the stock rises to 48 at a later date and the
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put that was originally bought for 3 points is now selling for 1 ¼ points. It is not
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unusual, by the way, for a put to retain this much of its value even though the stock
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has moved up and some amount of time has passed, since out-of-the-money puts
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tend to hold time value premium rather well. With XYZ at 48, an October 50 put
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might be selling for 3 points. The put holder could create a position designed to per
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mit recovery of some of his losses by selling two of the puts that he is long - October
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45's - and simultaneously buying one October 50 put. The net cost for this transac
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tion would be only commissions, since he receives $300 from selling two puts at 1 ¼
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each, which completely covers the $300 cost of buying the October 50 put. The
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transactions are summarized in Table 16-6.
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By selling 2 of the October 45 puts, the investor is now short an October 45 put.
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Since he also purchased an October 50 put, he has a spread ( technically, a bear
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spread). He has spent no additional money, except commissions, to set up this spread,
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since the sale of the October 45's covered the purchase of the October 50 put. This
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strategy is most attractive when the debit involved to create the spread is small. In
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this example, the debit is zero. |