23 lines
1.6 KiB
Plaintext
23 lines
1.6 KiB
Plaintext
Spreads Cotnbining
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Calls and Puts
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Certain types of spreads can be constructed that utilize both puts and calls. One of
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these strategies has been discussed before: the butterfly spread. However, other
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strategies exist that off er potentially large profits to the spreader. These other strate
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gies are all variations of calendar spreads and/or straddles that involve both put and
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call options.
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THE BUTTERFLY SPREAD
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This strategy has been described previously, although its usage in Chapter 10 was
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restricted to constructing the spread with calls. Recall that the butterfly spread is a
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neutral position that has limited risk as well as limited profits. The position involves
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three striking prices, utilizing a bull spread between the lower two strikes and a bear
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spread between the higher two strikes. The maximum profit is realized at the middle
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strike at expiration, and the maximum loss is realized if the stock is above the higher
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strike or below the lower strike at expiration.
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Since either a bull spread or a bear spread can be constructed with puts or calls,
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it should be obvious that a butterfly spread ( consisting of both a bull spread and a
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bear spread) can be constructed in a number of ways. In fact, there are four ways in
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which the spread can be established. If option prices are fairly balanced - that is, the
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arbitrageurs are keeping prices in line - any of the four ways will have the same
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potential profits and losses at expiration of the options. However, because of the ways
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in which puts and calls behave prior to their expiration, certain advantages or disad-
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