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However, capital commitment
for Position-1 is $ 23,463.00 (short sale margin + option
premium), but only $ 5,190.00 (premium) for
Position-2.
Why should I go for a position that requires four times the capital
outlay?
Sorry, didn't realise there were 2 charts & the
question:
Here's why not:
a/ ANY adjustment you do will result in greater friction cost
in the option market, not the more liquid underlying market. So the low
upfront sticker price is illusory. Friction = b/a spread + trade slippage +
commission in the option market v/s the underlying market.
b/ Any adjustment you do using the underlying to overcome the
friction cost of the option market will push up your capital outlay anyway so
why not cut to the chase ab initio.
The only outcome one leaves open for oneself if low capital
outlay is the defining constraint - is the unwinding of the total straddle
position once it becomes wildly profitable OR loses some preset value like 20%
or 50% of entry price.
This predicates a large explosive move of the sort not
normally seen with such short fuses to expiration in order to make money. It
happens, but with the frequency of a 4 sigma deviation.
I view it as a choice between the max risk of $5190 or a risk
of $2250 (on a 10 lot equivalent position to the IBM example given in the
other email).
The latter of the 2 is more appealing to me, given the
frequency of adjustments that I intend to make to the position & the
liquidity of the instrument I will use to make the adjustment in & the
other constraints I may face or strengths I may have (eg ease of
execution).
Still - different strokes achieve the same goal of getting to
1st base, so...
Gitanshu
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