44 lines
1.9 KiB
Plaintext
44 lines
1.9 KiB
Plaintext
174 Part VI: Measuring and Trading Volatility
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First, one can see that the bullish spread position has a total risk of 17 points, if
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XYZ is below 80 (the lower striking price of the put spread) at expiration. That, of
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course, is more than the 10-point cost of the July 100 call by itself, but if one is using
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a trading stop of any sort, he probably would not be at risk for the entire 17 points,
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since he wouldn't hold on while the stock fell all the way to 80 and below. Note also
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that the bullish spread position would have a loss of 10 points (the same as the call)
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at a price of 87 for the common at expiration. Hence, the combined position actual
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ly has less risk than the outright call purchase as long as XYZ is 87 or higher at expi
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ration. Since one is supposedly bullish initially when establishing this strategy, it
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seems likely that he would figure the stock would be 87 or higher at expiration.
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Figure 37-7 offers another comparison, that of the two positions after 30 days
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have passed. Note that the spread position once again does better on the upside and
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worse on the downside. The crossover point between the two curves is at about a
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price of 95. That is, ifXYZ is above 95 in 30 days, the bullish spread position will out
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perform the call buy.
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One final point should be made regarding the investment required. The out
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right call purchase requires an investment of $1,000 - the cost of the long call. The
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bullish spread position requires that $1,000, plus $700 for the spread (IO-point dif
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ference in the strikes, less the 3-point credit received for selling the spread). That's a
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total of $1,700, the risk of the bullish spread position. Hence, the rate of return might
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favor the outright call purchase, depending on how far the stock rallies.
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FIGURE 37-7.
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Results of the two positions in 30 days.
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1000
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en
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Ill
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0
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...J
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O 70 :;::,
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~ ... a.
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w
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-1000
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-2000-
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80
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95
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Bullish Spread
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Stock
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Spread
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110
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/
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1/
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Outright Call Purchase
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120 |