34 lines
2.1 KiB
Plaintext
34 lines
2.1 KiB
Plaintext
234 • The Intelligent Option Investor
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I provide actual market examples of these strategies in this chapter and will
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point out the effect of both these points in those examples.
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Because these strategies are a mix of exposures, it makes sense
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that they are just complex (i.e., multioption) positions. I will discuss the
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following:
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1. Long diagonal
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2. Short diagonal
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Note that the nomenclature I use here is a bit different from what others
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in the market may use. What I term a diagonal in this book is what others
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might call a “spit-strike synthetic stock. ” Since Bernie Madoff ’s infamous
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“split-strike conversion” fraud, this term doesn’t have a very good ring to
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it. For other market participants, a diagonal means simultaneously buying
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and selling options of the same type (i.e calls or puts). In this book, it means
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selling an option of one kind and buying the other kind.
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I will also talk about what is known in the options world as overlays. One
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of the most useful things about options is the way that they can be grafted or
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overlain onto an existing common stock position in a way that alters the port-
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folio’s overall risk-reward profile. The strategies I will review here are as follows:
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1. Covered calls
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2. Protective puts
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3. Collars
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These strategies are popular but often misunderstood ways to alter your
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portfolio’s risk-reward profile.
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Coming this far in this book, you already have a good understand-
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ing about how options work, so the concepts presented here will not be
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difficult, but I will discuss some nuances that will help you to evaluate
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investment choices and make sound decisions regarding the use of these
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strategies. I will refer to strike selection and tenor selection in the following
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pages, but for these, along with “The Gist” section, I’ll include an “Execu-
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tion” section and a “Common Pitfalls” section.
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Covered calls are an easy strategy to understand once you understand
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short puts, so I will discuss those first. Protective puts share a lot of simi-
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larities with in-the-money (ITM) call options, and I will discuss those next. |