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Strategies & Market Trends : Roger's 1998 Short Picks
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To: Dale Baker who wrote (18507)12/16/1999 9:39:00 AM
From: Daniel Chisholm  Read Replies (2) of 18691
 
Re: ZIXI Short stock + out-of-the-money call

Dale,

re-examine the profit & loss curve, you ought to find that what telebob said is exactly correct (i.e., that your position is equivalent to simply owning a $75 put). Basic options arbitrage relationships will usually ensure that this is pretty much the case.

A put would simply lose value if ZIXI goes to 100 and not provide the boxing protection.

In this case, a put (all by itself) would become worthless. I don't think "losing boxing protection" is relevant -- what happens in this scenario (stock goes way, way up) is:

--Portfolio A: long 75 call + short stock at $60 -- call profits essentially cancel short losses (above strike price). You're behind by about $15 here (your short stock loss from $60-->$75), plus whatever the call cost you (a couple of bucks?)

--Portfolio B: long 75 put. You lose all the premium you paid, which will probably be about $17 or $18.

See how the loss is essentially identical?

Mentally mark yourself to market on options expiration day, decide whether you want to be short (with the stock at $100), and whether or not you want to purchase "insurance". Take appropriate action from there.

One way or another, you paid the price (premium) for limited loss, whether in the form of an OTM call (to protect a short) or in the case of a standalone ITM put.

- Daniel
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