37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
92 Part II: Call Option Strategies
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The basic strategy involves, as an initial step, selecting the target price at which
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the writer is willing to sell his stock
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Example: A customer owns 1,000 shares ofXYZ, which is currently at 60, and is will
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ing to sell the stock at 80. In the meantime, he would like to realize a positive cash
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flow from writing options against his stock This positive cash flow does not neces
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sarily result in a realized option gain until the stock is called away. Most likely, with
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the stock at 60, there would not be options available with a striking price of 80, so one
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could not write 10 July 80's, for example. This would not be an optimum strategy
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even if the July 80's existed, for the investor would be receiving so little in option pre
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miums - perhaps 10 cents per call - that writing might not be worthwhile. The incre
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mental return strategy allows this investor to achieve his objectives regardless of the
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existence of options with a higher striking price.
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The foundation of the incremental return strategy is to write against only a part
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of the entire stock holding initially, and to write these calls at the striking price near
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est the current stock price. Then, should the stock move up to the next higher strik
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ing price, one rolls up for a credit by adding to the number of calls written. Rolling
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for a credit is mandatory and is the key to the strategy. Eventually, the stock reaches
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the target price and the stock is called away, the investor sells all his stock at the tar
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get price, and in addition earns the total credits from all the option transactions.
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Example: XYZ is 60, the investor owns 1,000 shares, and his target price is 80. One
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might begin by selling three of the longest-term calls at 60 for 7 points apiece. Table
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2-26 shows how a poor case - one in which the stock climbs directly to the target
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price - might work. As Table 2-26 shows, if XYZ rose to 70 in one month, the three
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original calls would be bought back and enough calls at 70 would be sold to produce
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a credit - 5 XYZ October 70's. If the stock continued upward to 80 in another month,
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the 5 calls would be bought back and the entire position - 10 calls - would be writ
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ten against the target price.
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IfXYZ remains above 80, the stock will be called away and all 1,000 shares will
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be sold at the target price of 80. In addition, the investor will earn all the option cred
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its generated along the way. These amount to $2,800. Thus, the writer obtained the
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full appreciation of his stock to the target price plus an incremental, positive return
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from option writing.
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In a flat market, the strategy is relatively easy to monitor. If a written call loses
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its time value premium and therefore might be subject to assignment, the writer can
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roll f01ward to a more distant expiration series, keeping the quantity of written calls
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constant. This transaction would generate additional credits as well. |