Options2 - Introduction to Options II By Dr Fernando Diz...

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Introduction to Options II By Dr. Fernando Diz
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Hedge Strategies Hedge or covered strategies involve  positions in both the underlying security  and one or more options .
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Covered call writing It involves writing calls against an  underlying portfolio of the underlying  security. For example, let’s say you have a long  position (own) 100 shares of IBM,   trading at $115/share.
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Covered call writing Suppose the Feb 115 call option quoted  bid price is  $6.30 per share, that is $630  per contract.  What would be the profit diagram at  expiration of a strategy that sells one call  option?
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Covered call writing The profit of this strategy is equal to: Profit from holding 100 shares of the stock  PLUS Profit from writing 1 call on those shares.
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Profit graph for a covered call at expiration Profits of Covered Call Writting E=115, C=6.3, S=115 -10000 -8000 -6000 -4000 -2000 0 2000 4000 6000 30 50 70 90 110 130 150 170 Covered Call Profit: $630 Long Stock Profits Written Call Profits E=115
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The covered call: Reduces the potential loss from owning  the stock by the amount of the premium  received. Limits the upside potential since it has a  constant profit.
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The covered call: Break-even point is equal to the stock  price at purchase time minus the call  premium: S-C. Maximum profit potential is equal to: E- S+C
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The covered call: Does the profit diagram look like some  other one? The covered call has a constant profit  when the stock is above its original  purchase price.
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The covered call: The covered call loses money when the  stock price goes up below its original  purchase price by the amount of the  premium. So what does the profit diagram of a  covered call look like?
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A written PUT!!! Written Put Profits E=115, P=6.3 -5000 -3000 -1000 1000 50 100 150 Stock Price at Expiration E:115
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Aggressive or defensive? Covered call write with in the money (defensive) and out of the money (aggresive) options -1000 -800 -600 -400 -200 0 200 400 600 35 40 45 50 55 60 65 70 75 C1 = 8, K=40 C2 = 1, K=50
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Return calculation Example: Buy 500 shares of XYZ @ 43, Write 5 XYZ July 45 calls @ 3.
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