Joe, Kash: Option Trading
Ratio-Backspread (=you need no cash, limited loss, unlimited upside potential):
I try to clarify. Given the following situation:
You own a stock (for example AMD)
You are definitely bullish on this stock (f.e. AMD)
You expect a strong price movement over the next time period, say until Jan01 or even Jan02 (f.e. AMD)
You have no much cash left (f.e. me, anybody else?) or you dont want to enlarge your position in this stock big time. (f.e. me)
You want to be protected against a downside turn (f.e. Austin burning, Dresden contamination [tm pauL], Californian earthquake)
Now, at least from a textbook view, a Ratio-Backspread is a suitable strategy.
Example: assume AMD $70, then:
1) You own 1 sh
2) You sell 1 CC Jan02/70 (at the money)
3) With this cash you buy 2 C Jan02/100 (ratio 2:1).
Now on expiry (Jan02), your option position is the following:
1) If AMD is below $70, all calls are out of the money and expire worthless. No loss.
2) If AMD is $100, you have to serve (I dont know the word) the CC $70, same time your 100 expire worthless. You loose $30. This is the biggest loss you can suffer.
3) If AMD is about $130, your 1 CC70 and your 2 C100 do equalize. No gain.
4) If AMD is above $130 you win on your position. No upside limit.
To make it even more interesting: if you don't see a real chance for AMD to cross 130 on expiration by a hefty margin, you clear your position early before expiry (say in October, if guidance or other facts are no too positive). If AMD is already above $70 at this time (october), your'e going to clear you position probably with a (small) gain. So I think it's important to do this strategy with LEAPS.
However, there's no free lunch. AFAIK, you have to watch your position and maybe you have to react a time span well before expiration. But if there were suitable Jan02 LEAPS with strike > 120 and your'e prepared to risk somewhat and you don't want to invest more cash, this strategy sounds very interesting. BTW, I said you own the stock. So if you consider the *whole* position then the following happens: below 70 you loose on the stock only (Well, I assume you do anyway). Between 70 and 130 there's no gain (but only if you don't clear your option position timely!). Above 130 your'e going to gain about two $ on every single $ price movement of your underlying stock. So you can say you defer you gains in the 70/130 range in order to magnify them if you stock is moving big time (well over 130).
Anybody interested? Any comments? Any experience? Anyone who knows anyone with experience? (BTW, please don't nail me on the *very* exact numbers above)
Boris |
