39 lines
1.4 KiB
Plaintext
39 lines
1.4 KiB
Plaintext
Chapter 23: Spreads Combining Calls and Puts
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FIGURE 23-1.
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Call buy and put credit (bull) spread.
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+$2,000
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+$1,000
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(/J
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(/J
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0 ..J
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0 $0 -e a.
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-$1,000
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-$2,000
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70 80
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.... ,, -----,, -=-----'
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THE BEARISH SCENARIO
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~ Spread at Expiration
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Call Buy Only, at Expiration
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341
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Stock
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In a similar manner, one can construct a position to take advantage of a bearish opin
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ion on a stock. Again, this would be most useful when the options were overpriced
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and one felt that an at-the-money put was too expensive to purchase by itself.
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Example: XYZ is trading at 80, and one has a definite bearish opinion on the stock.
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However, the December 80 put, which is selling for 8, is expensive according to an
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option analysis. Therefore, one might consider selling a call credit spread (out-of-the
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money) to help reduce the cost of the put. The entire position would thus be:
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Buy 1 December 80 put:
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Sell l December 90 call:
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Buy 1 December 100 call:
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Total cost:
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8 debit
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4 credit
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2 debit
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6 debit ($600)
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The profitability of this position is shown in Figure 23-2. The straight line on that
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graph shows how the position would behave at expiration. The introduction of the
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call credit spread has increased the risk to $1,600 if the stock should rally to 100 or
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higher by expiration. Note that the risk is limited since both the put purchase and the
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call credit spread are limited-risk strategies. The margin required would be this max
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imum risk, or $1,600. |