38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
346 Part Ill: Put Option Strategies
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The bullish portion of this combination of calendar spreads would be set up by sell
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ing the shorter-term January 70 call for 3 points and simultaneously buying the
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longer-term April 70 call for 5 points. This portion of the spread requires a 2-point
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debit. The bearish portion of the spread would be constructed using the puts. The
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near-term January 60 put would be sold for 2 points, while the longer-term April 60
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put would be bought for 3. Thus, the put portion of the spread is a I-point debit.
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Overall, then, the combination of the calendar spreads requires a 3-point debit, plus
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commissions. This debit is the required investment; no additional collateral is
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required. Since there are four options involved, the commission cost will be large.
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Again, establishing the spreads in quantity can reduce the percentage cost of com
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missions.
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Note that all the options involved in this position are initially out-of-the-money.
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The stock is below the striking price of the calls and is above the striking price of the
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puts. One has sold a near-term put and call combination and purchased a longer-term
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combination. For nomenclature purposes, this strategy is called a "calendar combi
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nation."
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There are a variety of possible outcomes from this position. First, it should be
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understood that the risk is limited to the amount of the initial debit, 3 points in this
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example. If the underlying stock should rise dramatically or fall dramatically before
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the near-term options expire, both the call spread and the put spread will shrink to
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nearly nothing. This would be the least desirable result. In actual practice, the spread
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would probably have a small positive differential left even after a premature move by
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the underlying stock, so that the probability of a loss of the entire debit would be
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small.
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If the near-term options both expire worthless, a profit will generally exist at
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that time.
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Example: IfXYZ were still at 65 at January expiration in the prior example, the posi
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tion should be profitable at that time. The January call and put would expire worth
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less with XYZ at 65, and the April options might be worth a total of 5 points. The
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spread could thus be closed for a profit with XYZ at 65 in January, since the April
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options could be sold for 5 points and the initial "cost" of the spread was only 3 points.
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Although commissions would substantially reduce this 2-point gross profit, there
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would still be a good percentage profit on the overall position. If the strategist decides
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to take his profit at this time, he would be operating in a conservative manner.
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However, the strategist may want to be more aggressive and hold onto the April
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combination in hopes that the stock might experience a substantial movement before
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those options expire. Should this occur, the potential profits could be quite large. |