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Allan Green wrote:
> A short time ago, my broker gave me some info on entereing an option
> position on the Canadian $ . The idea was to buy a 730 call with a premium
> of .66 or $660. To cheapen up the trade, he also advised the following.
> Sel a 750 call @ .13 or $130 and sell a 720 put @ .47 or $470. This made
> the net cost of the position .06 or $60 plus commission. If I understand
> this correctly, it limits the upside to the trade to the Can$ going to 75.
> He also advised putting a stop on the put at a premium of .80.
This is an outright bullish position. It is a bull spread plus a
short put. It has unlimited risk to the downside, and limited profit
to the upside. The short put would get you into big trouble if the
price declined. Your stop could get hit on any increase in
volatility, and leave you with a double loss. It is only appropriate
if you are extremely bullish on the CD.
> In light of this info on the Can$, I was trying to figure out how this
> would work with the Yen situation to cheapen up the entry. I did the
> following calculations in regards to opening positions.
>
> Buy 88 yen call @ 1.58, Sell 92 Yen call @ .73 and Sell 82 Yen put at .72
> for a net prem cost of .13. On the other side of the strangle I
> calculated, Buy 84 put @ 1.34, Sell 80 put @ .56 and sell 92 call @ .73 for
> a net prem cost of .05. All in all these position work out to a net cost
> of about $216 plus commission.
If you are interested in a long strangle, then you are saying you
expect a move in price soon, but have no idea which way. Your
proposed position consists of a very bullish one, like the CD spread
above, plus a very bearish one. This makes no sense. In effect, you
would be putting on a long 4-way spread strangle, and a short
strangle at the same time. You are buying the long strangle because
you think it will get more valuable, but if it does the short
strangle you have sold will create a bigger loss than any possible
profit.
I don't know where you are getting your prices, but for 8/15/97 I
have the following settlements...
JYU 85.19
88 call .24
92 call .04
84 put .54
80 put .05 (no trades)
The far OTM options are too cheap to be worth selling, IMHO, but
anyway, a four-way spread strangle (buy 88C, sell 92C, buy 84P, sell
80P) has the following characteristics, if we assume a 13%
volatility, which is what the options currently imply...
Cost $862.50 + 4 commissions
Break-Even points - about 88.65/83.30 (excluding commissions)
Probability of profit 53%
Expected outcome - a $63 profit (minus those commissions)
Max poss. profit - about $4140
To analyze option strategies you need some software. Take a look at
http://www.manticsoft.com
and download the free demo. I find it useful (no other connection).
Only $89
Bob
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