43 lines
2.7 KiB
Plaintext
43 lines
2.7 KiB
Plaintext
344 Part Ill: Put Option Strategies
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it of 9.30. Since the maximum value of the spread is l 0, one is giving away 70 cents,
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quite a bit for just such a short time remaining.
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However, suppose that one looks at the puts and finds these prices:
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Put
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January 80 put
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January 70 put
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Bid Price
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0.20
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none
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Asked Price
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0.40
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0.10
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One could "lock in" his call spread profits by buying the January 80 put for 40 cents.
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Ignoring commissions for a moment, if he bought that put and then held it along with
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the call spread until expiration, he would unwind the call spread for a 10 credit at
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expiration. He paid 40 cents for the put, so his net credit to exit the spread would be
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9.60 - considerably better than the 9.30 he could have gotten above for the call
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spread alone.
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This put strategy has one big advantage: If the underlying stock should sudden
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ly collapse and tumble beneath 70 - admittedly, a remote possibility - large profits
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could accrue. The purchase of the January 80 put has protected the bull spread's
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profits at all prices. But below 70, the put starts to make extra money, and the spread
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er could profit handsomely. Such a drop in price would only occur if some material
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ly damaging news surfaced regarding X'iZ Company, but it does occasionally happen.
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If one utilizes this strategy, he needs to carefully consider his commission costs
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and the possibility of early assignment. For a professional trader, these are irrelevant,
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and so the professional trader should endeavor to exit bull spreads in this manner
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whenever it makes sense. However, if the public customer allows stock to be assigned
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at 80 and exercises to buy stock at 70, he will have two stock commissions plus one
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put option commission. That should be compared to the cost of two in-the-money
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call option commissions to remove the call spread directly. Furthermore, if the pub
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lic customer receives an early assignment notice on the short January 80 calls, he may
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need to provide day-trade margin as he exercises his January 70 calls the next day.
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Without going into as much detail, a bear spread's profits can be locked in via a
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similar strategy. Suppose that one owns a January 60 put and has sold a January 50
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put to create a bear spread. Later, with the stock at 45, the spreader wants to remove
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the spread, but again finds that the markets for the in-the-money puts are so wide
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that he cannot realize anywhere near the 10 points that the spread is theoretically
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worth. He should then see what the January 50 call is selling for. If it is fractionally
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priced, as it most likely will be if expiration is drawing nigh, then it can be purchased
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to lock in the profits from the put spread. Again, commission costs should be con
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sidered by the public customer before finalizing his strategy. |