37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 26: Buying Options and Treasury Bills 415
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1. Assume that each underlying stock can advance or decline in accordance with its
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volatility over a fixed time period (30, 60, or 90 days).
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2. Estimate the call prices after the advance, or put prices after the decline.
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3. Rank all potential purchases by the highest reward opportunity.
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The user of this strategy need only be interested in those option purchases that
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provide the highest reward opportunity under this ranking method. In the previous
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chapters on option buying, it was mentioned that one might want to look at the
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risk/reward ratios of his potential option purchases in order to have a more conser
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vative list. However, that is not necessary in the Treasury bill/option strategy, since
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the overall risk has already been limited. A ranking of option purchases via the fore
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going criteria will generally give a list of at- or slightly out-of-the-money options.
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These are not necessarily "underpriced" options; although if an option is truly under
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priced, it will have a better chance of ranking higher on the selection list than one
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that is "overpriced."
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A list of potential option purchases that is constructed with criteria similar to
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those outlined above is available from many data services and brokerage firms. The
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strategist who is willing to select his option purchases in this manner will find that he
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does not have to spend a great deal of time on the selection process. The reader
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should note that this type of option purchase ranking completely ignores the outlook
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for the underlying stock. If one would rather make his purchases based on an outlook
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for the underlying stock - preferably a technical outlook - he will be forced to spend
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more time on his selection process. Although this may be appealing to some
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investors, it will probably yield worse results in the long run than the previously
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described unbiased approach to option purchases, unless the strategist is extremely
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adept at stock selection.
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KEEPING THE RISK LEVEL EQUAL
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The second function that the strategist has to perform in this Treasury bill/option
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strategy is to keep his risk level approximately equal at all times.
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Example: An investor starts the strategy with $90,000 in Treasury bills (T-bills) and
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$10,000 in option purchases. After some time has passed, the option purchases may
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have worked out well and perhaps he now has $90,000 in T-bills plus $30,000 worth
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of options, plus interest from the T-bills. Obviously, he no longer has 90% of his
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money in fixed-income securities and 10% in option purchases. The ratio is now 75%
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in T-bills and 25% in option purchases. This is too risky a ratio, and the strategist
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must consequently sell some of his options and buy T-bills with the proceeds. Since
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his total assets are $120,000 currently, he must sell out $18,000 of options to bring his |