26 lines
1.8 KiB
Plaintext
26 lines
1.8 KiB
Plaintext
Chapter 11: Ratio Call Spreads 221
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The ESP method is merely a confirmation of the other method. Either one
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works well. The spreader should become familiar with the ESP method because, in
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a position with many different options, it reduces the exposure of the entire position
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to a single number.
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TAKING PROFITS
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In addition to defensive action, the spreader may find that he can close the spread
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early to take a profit or to limit losses. If enough time has passed and the underlying
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stock is close to the maximum profit point - the higher striking price - the spreader
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may want to consider closing the spread and taking his profit. Similarly, if the under
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lying stock is somewhere between the two strikes as expiration draws near, the writer
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will normally find himself with a profit as the long call retains some intrinsic value
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and the short calls are nearly worthless. If at this time one feels that there is little to
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gain (a price decline might wipe out the long call value), he should close the spread
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and take his profit.
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SUMMARY
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Ratio spreads can be an attractive strategy, similar in some ways to ratio writing. Both
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strategies offer a large probability of making a limited profit. The ratio spread has
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limited downside risk, or possibly no downside risk at all. In addition, if the long
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call(s) in the spread can be bought with little or no time value premium in them, the
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ratio spread becomes a superior strategy to the ratio write. One can adjust the ratio
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used to reflect his opinion of the underlying stock or to make a neutral profit range
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if desired. The ratio adjustment can be accomplished by using the deltas of the
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options. In a broad sense, this is one of the more attractive forms of spreading, since
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the strategist is buying mostly intrinsic value and is selling a relatively large amount
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of time value. |