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Investors often consider the maximum potential return for an position to be capped or limited, however, potential returns for s can be increased after initial entry through rolling.
An is a and is a combination of two other popular strategies, the and the . An performs best when the underlying does not move significantly up or down after entry.
A consists of selling an out-of-the-money in addition to purchasing a at a lower strike price. The bull-put strategy is a neutral to bullish strategy. If the price of the underlying is equal to or greater than the strike price of the short at expiration, the position will retain the initial net credit and will be fully profitable.
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The margin requirement for a position can be calculated as:
|Margin Requirement for =
[(Short Put Option Strike - Long Put Option Strike) - Bull-Put Credit] *
# of contracts * 100 shares/contract
The potential return for a position can be calculated as:
|Bull-Put Potential Return =
initial net credit/share * 100 shares/contract * # contracts
A position involves selling an out-of-the-money in addition to purchasing a at a higher strike price. The bear call strategy is a neutral to bearish strategy. If the price of the underlying is equal to or less than the strike price of the short at expiration, the position will retain the initial net credit and will be fully profitable.
» return goal > 2% / month
» works in any market
The margin requirement for a can be calculated as:
|Margin Requirement for Bear Call Credit Spreads
= [(Long Call Opt. Strike - Short Call Opt. Strike) - Bear Call Credit)] *
# contracts * 100 shares/contract
The potential return for the is the same as for the illustrated earlier.
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The margin requirement for an can be either the cumulative margin requirement for the and for the or for only one position. The latter margin requirement is a special margin condition which generally applies if the spreads between the and the are equal and all the options expire at the same time. Special margin allows investors to essentially double their returns when applicable.
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The return calculation for the is the same as illustrated earlier for the strategy.
As an illustration of rolling a position from Chromium TradeFolioTM
will be analyzed.
On 3/24/2009, the following position was entered by Chromium service for the NDX index:
|| Buy To Open Put
||Sell To Open Put
||Sell To Open Call
||Buy To Open Call
The position qualified for special margin, as the difference between the spreads was equal and all of the options expired at the same time. The position was entered at a net credit of $0. 75 which represented a potential return of 3. 1%.
The price at entry of the underlying index NEX was $1238. s were entered with stop-loss points set at 2% of the strike prices. The s were set to close the s if the predetermined stop-loss point was transgressed. The lower stop-loss was set for $969 and the upper stop-loss was set for $1446. With the stop-losses, the price of NDX could fall -21% or rise 16% and the position would remain fully profitable.
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On 4/6/2009, NDX had risen in price since entry to $1313 and the price of the short NDKPS(APR 950) had decreased by at least 80% and the was a candidate to be rolled. The following position was decided to be rolled to:
||Buy To Open Put
||Sell To Open Put
||NDUPI (APR 1075)
||NDUPL (APR 1100)
The initial long NDKPE(APR 925) was sold to close for $0. 35 and the initial short NDKPS(APR 950) was bought to close for $0. 44. The total net credit for rolling the was $0. 50 calculated as: $2. 15-$1. 56 + ($0. 44-$0. 35).
A new lower was entered for closing the short with a stop-loss price of 1122 which represented 2% of the short strike price. The new lower stop-loss allowed the NDX to drop in price -14% and still remain fully profitable.
At expiration on 4/17/2009 the position had not hit a stop-loss and the price of $NDX was at $1354 which was higher than the short strike price of $1100 and below the short strike price of $1475.
As a result, the position was fully profitable with all options expiring worthless. The initial net credit of $0. 75 and also the incremental net credit from rolling of $0. 50 was retained for a total profit of $1. 25 per share of underlying or $125 per contract. The total net credit represented a return of 5. 2%, almost double the initial return at entry of 3. Order skin & coat chews dogs order skin & coat chews dogs no rx required no rx required
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[tags] margin requirement, potential return, strike price [/tags] ?? 2008-2016 Legit Express Chemist.