38 lines
2.5 KiB
Plaintext
38 lines
2.5 KiB
Plaintext
Chapter 12: Combining Calendar and Ratio Spreads 223
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term calls while buyingfewer of the intermediate-term or long-term calls. Since more
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calls are being sold than are being bought, naked options are involved. It is often pos
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sible to set up a ratio calendar spread for a credit, meaning that if the underlying
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stock never rallies above the strike, the strategist will still make money. However,
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since naked calls are involved, the collateral requirements for participating in this
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strategy may be large.
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Example: As in the bullish calendar spreads described in Chapter 9, the prices are:
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XYZ common, 45;
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XYZ April 50 call, l; and
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XYZ July 50 call, l½.
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In the bullish calendar spread strategy, one July 50 is bought for each April 50 sold.
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This means that the spread is established for a debit of½ point and that the invest
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ment is $50 per spread, plus commissions. The strategist using the ratio calendar
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/ spread has essentially the same philosophy as the bullish calendar spreader: The
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stock will remain below 50 until April expiration and may then rally. The ratio calen
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dar spread might be set up as follows:
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Buy 1 XYZ July 50 call at l½
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Sell 2 XYZ April 50 calls at 1 each
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Net
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l½ debit
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2 credit
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½ credit
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Although there is no cash involved in setting up the ratio spread since it is done for
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a credit, there is a collateral requirement for the naked April 50 call.
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If the stock remains below 50 until April expiration, the long call - the July 50
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- will be owned free. After that, no matter what happens to the underlying stock, the
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spread cannot lose money. In fact, if the underlying stock advances dramatically after
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near-term expiration, large profits will accrue as the July 50 call increases in value. Of
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course, this is entirely dependent on the near-term call expiring worthless. If the
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underlying stock should rally above 50 before the April calls expire, the ratio calen
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dar spread is in danger of losing a large amount of money because of the naked calls,
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and defensive action must be taken. Follow-up actions are described later.
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The collateral required for the ratio calendar spread is equal to the amount of
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collateral required for the naked calls less the credit taken in for the spread. Since
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naked calls will be marked to market as the stock moves up, it is always best to allow
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enough collateral to get to a defensive action point. In the example above, suppose
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that one felt he would definitely be taking defensive action if the stock rallied to 53 |