34 lines
2.5 KiB
Plaintext
34 lines
2.5 KiB
Plaintext
Chapter 24: Ratio Spreads Using Puts 361
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down. Rather, one should be able to close the position with the puts close to parity if
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the stock breaks below the downside break-even point. The spreader may want to buy
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in additional long puts, as was described for call spreads in Chapter 11, but this is not
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as advantageous in the put spread because of the time value premium shrinkage.
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This strategy may prove psychologically pleasing to the less experienced
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investor because he will not lose money on an upward move by the underlying stock.
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Many of the ratio strategies that involve call options have upside risk, and a large
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number of investors do not like to lose money when stocks move up. Thus, although
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these investors might be attracted to ratio strategies because of the possibility of col
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lecting the profits on the sale of multiple out-of-the-money options, they may often
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prefer ratio put spreads to ratio call spreads because of the small upside risk in the
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put strategy.
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USING DELTAS
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The "delta spread" concept can also be used for establishing and adjusting neutral
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ratio put spreads. The delta spread was first described in Chapter 11. A neutral put
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spread can be constructed by using the deltas of the two put options involved in the
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spread. The neutral ratio is determined by dividing the delta of the put at the higher
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strike by the delta of the put at the lower strike. Referring to the previous example,
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suppose the delta of the January 45 put is -.30 and the delta of the January 50 put is
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-.50. Then a neutral ratio would be 1.67 (-.50 divided by -.30). That is, 1.67 puts
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would be sold for each put bought. One might thus sell 5 January 45 puts and buy 3
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January 50 puts.
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This type of spread would not change much in price for small fluctuations in the
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underlying stock price. However, as time passes, the preponderance of time value
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premium sold via the January 45 puts would begin to tum a profit. As the underlying
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stock moves up or down by more than a small distance, the neutral ratio between the
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two puts will change. The spreader can adjust his position back into a neutral one by
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selling more January 45's or buying more January 50's.
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THE RATIO PUT CALENDAR SPREAD
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The ratio put calendar spread consists of buying a longer-term put and selling a larg
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er quantity of shorter-term puts, all with the same striking price. The position is gen
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erally established with out-of-the-money puts that is, the stock is above the striking
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price - so that there is a greater probability that the near-term puts will expire worth- |