34 lines
2.4 KiB
Plaintext
34 lines
2.4 KiB
Plaintext
348 Part Ill: Put Option Strategies
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In summary, this is a reasonable strategy if one operates it over a period of time
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long enough to encompass several market cycles. The strategist must be careful not
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to place a large portion of his trading capital in the strategy, however, since even
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though the losses are limited, they still represent his entire net investment. A varia
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tion of this strategy, whereby one sells more options than he buys, is described in the
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next chapter.
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THE CALENDAR STRADDLE
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Another strategy that combines calendar spreads on both put and call options can be
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constructed by selling a near-term straddle and simultaneously purchasing a longer
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term straddle. Since the time value premium of the near-term straddle will decrease
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more rapidly than that of the longer-term straddle, one could make profits on a lim
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ited investment. This strategy is somewhat inferior to the one described in the pre
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vious section, but it is interesting enough to examine.
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Example: Suppose that three months before January expiration, the following prices
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exist:
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XYZ common: 40
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January 40 straddle: 5 April 40 straddle: 7
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A calendar spread of the straddles could be established by selling the January 40
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straddle and simultaneously buying the April 40 straddle. This would involve a cost
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of 2 points, or the debit of the transaction, plus commissions.
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The risk is limited to the amount of this debit up until {he time the near-term
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straddle expires. That is, even if XYZ moves up in price by a substantial amount or
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declines in price by a substantial amount, the worst that can happen is that the dif
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ference between the straddle prices shrinks to zero. This could cause one to lose an
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amount equal to his original debit, plus commissions. This limit on the risk applies
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only until the near-term options expire. If the strategist decides to buy back the near
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term straddle and continue to hold the longer-term one, his risk then increases by the
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cost of buying back the near-term straddle.
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Example: XYZ is at 43 when the January options expire. The January 40 call can now
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be bought back for 3 points. The put expires worthless; so the whole straddle was
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closed out for 3 points. The April 40 straddle might be selling for 6 points at that
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time. If the strategist wants to hold on to the April straddle, in hopes that the stock
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might experience a large price swing, he is free to do so after buying back the January |