36 lines
2.9 KiB
Plaintext
36 lines
2.9 KiB
Plaintext
192 Part II: Call Option Strategies
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The spread between the April 50 and the July 50 has now widened to 5 points. Since
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the spread cost 3 points originally, this widening effect has produced a 2-point prof
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it. The spread could be closed at this time in order to realize the profit, or the spread
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er may decide to continue to hold the July 50 call that he is long. By continuing to
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hold the July 50 call, he is risking the profits that have accrued to date, but he could
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profit handsomely if the underlying stock rises in price over the next 3 months,
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before July expiration.
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It is not necessary for the underlying stock to be exactly at the striking price of
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the options at near-term expiration for a profit to result. In fact, some profit can be
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made in a range that extends both below and above the striking price. The risk in this
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type of position is that the stock will drop a great deal or rise a great deal, in which
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case the spread between the two options will shrink and the spreader will lose money.
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Since the spread between two calls at the same strike cannot shrink to less than zero,
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however, the risk is limited to the amount of the original debit spent to establish the
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spread, plus commissions.
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THE NEUTRAL CALENDAR SPREAD
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As mentioned earlier, the calendar spreader can either have a neutral outlook on the
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stock or he can construct the spread for an aggressively bullish outlook. The neutral
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outlook is described first. The calendar spread that is established when the underly
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ing stock is at or near the striking price of the options used is a neutral spread. The
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strategist is interested in selling time and not in predicting the direction of the under
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lying stock. If the stock is relatively unchanged when the near-term option expires,
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the neutral spread will make a profit. In a neutral spread, one should initially have
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the intent of closing the spread by the time the near-tenn option expires.
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Let us again tum to our example calendar spread described earlier in order to
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more accurately demonstrate the potential risks and rewards from that spread when
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the near-term, April, call expires. To do this, it is necessary to estimate the price of the
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July 50 call at that time. Notice that, with XYZ at 50 at expiration, the results agree
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with the less detailed example presented earlier. The graph shown in Figure 9-1 is the
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"total profit" from Table 9-1. The graph is a curved rather than straight line, since the
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July 50 call still has time premium. There is a slightly bullish bias to this graph: The
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profit range extends slightly farther above the striking price than it does below the
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striking price. This is due to the fact that the spread is a call spread. If puts had been
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used, the profit range would have a bearish bias. The total width of the profit range is
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a function of the volatility of the underlying stock, since that will determine the price |