37 lines
1.7 KiB
Plaintext
37 lines
1.7 KiB
Plaintext
Chapter 10: The BatterRy Spread 209
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Long July 70 call .
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Short July 60 call - Net credit 6½ points
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This bear spread has a maximum profit potential of 6½ points anywhere below 60 at
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July expiration. The maximum risk is 3½ points anywhere above 70 at expiration.
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Thus, the original butterfly spread was again converted into a position such that a
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stock price reversal to any price below 60 could produce something close to the max
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imum profit. Moreover, the risk was only increased by an additional ½ point.
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TABLE 10-4.
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Initial spread and new current prices.
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I nitiol Spread
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XYZ common: 60
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XYZ July 50 call: 12
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July 60 call: 6
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July 70 call: 3
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SUMMARY
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Current Prices
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XYZ common:
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July 50 call:
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July 60 call:
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July 70 call:
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75
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251/2
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16
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7
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The butterfly spread is a viable, low-cost strategy with both limited profit potential
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and limited risk. It is actually a combination of a bull spread and a bear spread, and
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involves using three striking prices. The risk is limited should the underlying stock
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fall below the lowest strike or rise above the highest strike. The maximum profit is
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obtained at the middle strike. One can keep his initial debits to a minimum by ini
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tially assuming a bullish or bearish posture on the underlying stock. If he would
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rather remain neutral, he will normally have to pay a slightly larger debit to establish
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the spread, but may have a better chance of making money. If the underlying stock
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experiences a large move in one direction or the other prior to expiration, the spread
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er may want to close the profitable side of his butterfly spread near its maximum
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profit potential in order to be able to capitalize on a stock price reversal, should one
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occur. |