35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
296 Part Ill: Put Option Strategies
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other available put writing positions before deciding to write another put on the sam<'
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underlying stock. His commission costs are the same if he remains in XYZ stock or if
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he goes on to a put writing position in a different stock.
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EVALUATING A NAKED PUT WRITE
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The computation of potential returns from a naked put write is not as straightforward
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as were the computations for covered call writing. The reason for this is that the col
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lateral requirement changes as the stock moves up or down, since any naked option
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position is marked to the market. The most conservative approach is to allow enough
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collateral in the position in case the underlying stock should fall, thus increasing the
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requirement. In this way, the naked put writer would not be forced to prematurely
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close a position because he cannot maintain the margin required.
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Example: XYZ is at 50 and the October 50 put is selling for 4 points. The initial col
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lateral requirement is 20% of 50 plus $400, or $1,400. There is no additional require
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ment, since the stock is exactly at the striking price of the put. Furthermore, let us
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assume that the writer is going to close the position should the underlying stock fall
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to 43. To maintain his put write, he should therefore allow enough margin to collat
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eralize the position if the stock were at 43. The requirement at that stock price would
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be $1,560 (20% of 43 plus at least 7 points for the in-the-money amount). Thus, the
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put writer who is establishing this position should allow $1,560 of collateral value for
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each put written. Of course, this collateral requirement can be reduced by the
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amount of the proceeds received from the put sale, $400 per put less commissions in
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this example. If we assume that the writer sells 5 puts, his gross premium inflow
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would be $2,000 and his commission expense would be about $75, for a net premi
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um of $1,925.
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Once this information has been determined, it is a simple matter to determine
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the maximum potential return and also the downside break-even point. To achieve
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the maximum potential return, the put would expire worthless with the underlying
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stock above the striking price. Therefore, the maximum potential profit is equal to
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the net premium received. The return is merely that profit divided by the collateral
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used. In the example above, the maximum potential profit is $1,925. The collateral
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required is $1,560 per put (allowing for the stock to drop to 43) or $7,800 for 5 puts,
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reduced by the $1,925 premium received, for a total requirement of $5,875. The
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potential return is then $1,925 divided by $5,875, or 32.8%. Table 19-2 summarizes
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these calculations. |