36 lines
2.0 KiB
Plaintext
36 lines
2.0 KiB
Plaintext
306 Part Ill: Put Option Strategies
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A straddle could be sold for 7 points. If the stock were above 38 and below 52 at expi
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ration, the straddle writer would profit, since the in-the-money option could ht·
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bought back for less than 7 points in that case, while the out-of-the-money option
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expires worthless (Table 20-2).
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TABLE 20-2.
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The naked straddle write.
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XYZ Price at Call Put Total
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Expiration Profit Profit Profit
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30 +$ 400 -$1,200 -$800
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35 + 400 700 - 300
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38 + 400 400 0
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40 + 400 200 + 200
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45 + 400 + 300 + 700
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50 100 + 300 + 200
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52 300 + 300 0
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55 600 + 300 - 300
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60 - 1,100 + 300 - 800
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Notice that Figure 20-2 has a shape like a roof. The maximum potential profit
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point is at the striking price at expiration, and large potential losses exist in either
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direction if the underlying stock should move too far. The reader may recall that the
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ratio call writing strategy - buying 100 shares of the underlying stock and selling two
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calls - has the same profit graph. These two strategies, the naked straddle write and
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the ratio call write, are equivalent. The two strategies do have some differences, of
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course, as do all equivalent strategies; but they are similar in that both are highly
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probabilistic strategies that can be somewhat complex. In addition, both have large
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potential risks under adverse market conditions or if follow-up strategies are not
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applied.
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The investment required for a naked straddle is the greater of the requirement
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on the call or the put. In general, this means that the margin requirement is equal to
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the requirement for the in-the-money option in a simple naked write. This require
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ment is 20% of the stock price plus the in-the-money option premium. The straddle
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writer should allow enough collateral so that he can take whatever follow-up actions
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he deems necessary without having to incur a margin call. If he is intending to close
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out the straddle if the stock should reach the upside break-even point - 52 in the
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example above - then he should allow enough collateral to finance the position with |