Series 7 Exam Preparation Lesson 16 Options pt. 6 2017

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Series 7 Study Guide 3rd Edition Lesson 16 options pt. 1 2017 Option Ratio Strategies including Combinations

This episode covers Option Ratio Strategies including Combinations
I decided to do one more podcast on options and this is just sort of going to be a cleanup of a few other miscellaneous things you may need to know for the series 7 exam on options. Now, the first one that you may be call on and there may be a question or two is called ratio strategies. And I don’t even know why they do this, what’s the point of this, but basically here’s a very simple example and this is probably sort of question you may have on the series 7.
Let’s say you own 100 shares of XYZ stock and you buy that stock at $40 a share, and immediately you write a call on that stock. So you’ve written the covered call on XYZ stock and let’s say you use a strike price of $40 a share as well. Well in addition to that one call, you might write two calls. Why would you do that? I don’t know but it’s one of these, in my opinion, stupid things that they cover in the series 7. Well the bottom line is you’re only covered to your loss to the extent of the one call you write. You’ve actually written two calls against the position of 100 shares so you have unlimited exposure on the one naked call you’ve written. If you really want to do that, why don’t you just write a naked call? And that’s the whole point of it. I guess if the stock goes down, you’re protected to the point of the premium you gathered by writing the two calls and those calls will expire worthless. But why would you buy a stock you think is going to go down to begin with? If the stock goes up, it will be called away from you. And not only will your stock be called away from you but you’ll be at an unlimited risk position on the second option you’ve written. You could do a number of different ratio strategies but the bottom line on most ratio strategies is a limit – your downside to the premium you’ve collected but there’s unlimited potential loss on the upside. I think that’s really all I’m gonna cover on ratio strategies………. This episode covers Option Ratio Strategies including Combinations

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