asx_UnderstandingOptionStrategies

You are unsure of the direction of the stock but you

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Unformatted text preview: trade is limited. The break-evens are at A plus the cost of the spread and at D less the cost of the spread. Loss: The maximum loss will occur at any point between the strike prices B and C. Volatility: The option value will increase as volatility increases which is generally good for the strategy. Alternatively a decrease in volatility will be generally bad for the strategy. Time Decay: As each day passes the value of the option erodes (bad). Most of the decay will occur in the final month before expiry. A D 0 B Loss C Event Driven Profit 23 BUY AND WRITE OR COVERED CALL Construction: Buy 1000 underlying shares Sell 1 Call at strike price A. Margins: No. Your Market Outlook: Neutral to slightly Bullish. The share price will not rise above the strike price A. Your objective is to earn income from the sale of the Call option, OR, it is also used to exit a stock at the strike price you sold the option which is when you would write an out of the money option. Profit: The maximum profit is the premium you sold the option for plus the difference between where you bought the stock and the s...
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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