reduces overall basis in the event of exercise.Writing short puts produces income and, possibly, allows youto accept exercise if the stock continues to decline. The strategyis also a feature of your long portfolio strategy. The pricedepression is a buying opportunity. As long as you have confidence that prices will eventually rally, the short put either produces income to reduce the basis in your existing holdings or, ifexercised, lowers your basis in the stock, often significantly.Both events speed your price recovery.It is a mistake to view short-put writing as simply an optionsonly, isolated strategy. If it is performed without a logical, fundamental basis for the decision, then it is not advisable. If it isperformed as a strategic form of contingent purchase, it placesyou at an advantage because actual basis in the stock becomesthe strike price minus put premium. If the stock’s support levelis at or above that net basis price, then short puts are a powerfulmethod for contingent purchase. The third reason for sellingputs—to reduce overall basis in the stock when the puts are
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exercised—can speed recovery time in a down market. Asdemonstrated in Chapter 6, the rescue strategy often transformsa paper loss into a paper profit immediately. When the short putis exercised and followed with the covered call leg of the strategy, it is entirely possible to recover all of the paper loss withoutwaiting out the market. If, in the meantime, the fundamentals ofthe company change for the worse, this fast recovery enables youto complete an exit strategy and still create a net gain.3. Repetitive covered call writing increases current income whilecushioning risk range. The most conservative strategy—writingcovered calls on existing stock positions—also helps to protectagainst paper loss, even in a down market. The strategy can beentered repeatedly, with current positions closed at a profit,allowed to expire, or rolled forward to avoid exercise. This creates a cash cow of current income without increasing marketrisk. This approach assumes, of course, that if exercised, thosecovered calls would create a gain in stock, not a net loss. If youare close to breakeven or if you will suffer a loss in the event ofexercise, then covered call writing is an ill-conceived strategyunder any circumstances except intentional exit due to changedfundamentals.4. Downside risk is also reduced with price averaging. When a shortput is exercised, you end up with reduced-basis stock. This is apositive outcome as long as you want more shares; however, ifthe fundamentals of the company are weakening, this is not aconservative strategy. The inadvisability of putting more moneyinto a poor investment makes this point. Conservative principles mandate that you cut losses as soon as the fundamentalattributes of a company begin to change. This does not alwaysrequire an immediate sale. Earlier in this chapter, the examplewas given in which a covered call was written at the same timeas a long put at a lower strike price. This is a rescue strategythat protects your position in the event of a downward pricemovement while producing potential gains in the event of aprice rally. The strategy is most practical when the long-putcost and short-call premium are close enough that the positionscan be opened with little or no net cost.
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Option Planning with Loss CarryoverOne potentially troubling aspect of using options in down markets isthe possible tax effect. If you create capital gains through exercise, thosegains are taxable. Do you prefer reversing paper profits or deferring taxable gains? A lot of emphasis is placed on tax deferral, but in reality, youare better off accepting additional tax this year if that tax results fromcreating net profits.The alternative—holding on to shares of stock whose basis is higherthan current market value—affects your current investment returnand, in some cases, traps you in a losing portfolio position. If you canuse options to change the course of profits, you are far better off. Forexample, let’s assume that your effective tax rate (federal and state combined) is 40 percent. All additional income you generate will be taxed atthe 40-percent rate, and your after-tax profit will be the remaining 60percent. In this condition, are you better off waiting?If your income is high enough this year that you would prefer to takeprofits in the future, then you can avoid creating additional profitsfrom options. However, the outcome of that decision is zero additionalprofits. If you can create additional earnings on your investment portfolio, you are ahead with a net 60 percent—compared to no profit at all.Current-year profits can also be sheltered entirely if you have a large carryover loss. With a limitation of $3,000 maximum net loss deduction peryear, you may need many years to absorb your loss. One solution is to generate profits in conservative strategies this year. Another is to offset currentyear gains against losses in stocks you want to dispose of without optionactivity. A third is to invite exercise by writing deep in-the-money coveredcalls to dispose of stock at a sure profit and to absorb a part of the carryover. In this situation, the loss of long-term status is not a concern becauseyour purpose is to dispose of stock and to use up the carryover loss.
Timing: Matching Current-Year Profits and LossesWhen it comes to tax ramifications, planning ahead is essential. If youface a large capital gains event this year, be careful to avoid writing inthe-money covered calls, which may put your long-term gain status in
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jeopardy. Such a consequence can be suffered unintentionally. Forexample, if you roll a short call forward and create an in-the-money situation without realizing its consequences, and then the call is exercised,you could end up with a large short-term gain instead of a long-termgain. The resulting tax liability could more than offset any option profits you earned in the strategy.Even without options, timing is an important aspect of tax planning. Ifyou have stocks you would like to sell and replace with more promisinggrowth issues, time the loss to offset part of the big gain you expect torealize this year. By planning ahead, you can match gains and losses inthe same year to minimize the impact of both, and if you are carryingforward a large loss, it can be used to shelter short-term gains fromoption trades.A carryover loss should be viewed as an investment portfolio problemand as an opportunity as well. It is a problem because it represents azero return on your investment. You can use only $3,000 per year, so ifyou are working with a $30,000 net loss, it will take 10 years to realizethe full benefit, and a $90,000 loss would take 30 years to absorb if youhad no gains in ensuing years. This situation is an advantage becauseyou are free to realize year-to-year gains without worrying about thetax consequences. Timing of sales does not matter, because your profitswill be absorbed to the extent of the loss carryover. The sooner youabsorb the carryover loss, the greater the benefits. In taxation, the concept of deferring liabilities while accelerating benefits is well understood. It is similar to calculations of internal rate of return. Youmaximize your earnings by compounding your return, avoiding idlecash or other value (and “value” can include the benefit of shelteredgains), and seeking maximum gain without additional risk. So, a largecarryover loss presents flexibility in the timing of current-year profits.Taxes complicate the calculation of net gain. This makes it necessary tothink about all of the aspects of gain and loss on a net of taxes basis. Amarginal gain can actually turn out to be a net loss if you do not planahead. With taxes and trading costs in mind, some options traders prefer to trade in blocks of options rather than in single contracts. Thequestion of how many contracts to use is a complex one for your conservative approach to options. It depends largely on the number of
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shares you own and the additional number you would like to acquire.The strategies we have shown employing single contracts can be easilyapplied in multiples. Risks are identical as long as the relationshipbetween the number of shares and the number of options remains thesame, at least on the short position. When you consider using longoptions, the question of risk changes. The more contracts you buy, thegreater your exposure to market risk, so you need to balance the dollaramount of risk with the potential benefits in long options—and youalso must understand the tax rules in any option strategy you use.Multiple option strategies also open up a range of strategic expansion.You can use rolling techniques to incrementally increase the number ofshort calls. If you own 1,000 shares, you can replace a single optioncontract with as many rolled-up contracts as you wish. This provides acredit on the transaction while avoiding exercise effectively.Conservative option strategies, when you own multiple lots of shares,also expand potential profitability and may even reduce risk. For example, you can write a series of covered calls at several strike price andexpiration levels. These strategies may not save trading fees, but they doadd interest and profit potential to your conservative use of options,notably to covered call strategic possibilities.The next chapter explains conservative combination strategies involving options. These can be used to dramatically reduce your basis instock while creating current returns with options and without incurring added market risk.
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8COMBINATIONCONSERVATIVETECHNIQUESThe most impressive returns available using options involvecombination strategies: spreads and straddles. With shortstraddles, you can achieve higher-than-average current returns.However, in utilizing these more advanced strategies, there aretwo important points to remember. First, the complex tax rulesfor such positions could jeopardize your long-term capital gainsstatus. Second, the risks involved are conservative only if andwhen the basic assumptions continue to apply. These includeyour willingness to acquire more shares of stock and to acceptexercise if and when it occurs, and your continued belief thatthe fundamental value of the companies remains strong.
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ptions traders employ a vast variety of strategies, combiningoptions in short and long positions, hoping for various formsof price movement (or lack of movement), and hedging otherpositions in stock, both long and short. Most of these strategies areinappropriate for your portfolio. However, some combinations canprovide a valuable way to maximize your income from options withoutadded market risk.Many of these strategies have always been available on short-termoptions but considered impractical because expiration invariablyoccurred too soon. With the advent of LEAPS options, the entire picture has changed. Because LEAPS options last up to 36 months,advanced strategies have moved from the realm of theory into therealm of practicality. For speculators, this means that it is possible totake greater risks and create combinations with potential for higherthan-average earnings or losses. For conservative investors, the availability of long-term options increases the current income potentialwith less concern for pending expiration.In this chapter, we briefly explain the various types of combinations toprovide a complete background and explanation of the range of possibilities; and then we provide examples of some very interesting conservative strategies that do meet your conservative profile: the creationof higher-than-average returns without a corresponding increase inmarket risk.
Spread TechniquesThe first popular strategy is the spread, the opening of two or moreoption positions on the same stock, involving different expiration datesor different strike prices. A more complex spread involves both different expiration and strike features.
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The options industry has its own range of specialized terms, each usedto communicate specific strategies and positions. For example, aspread can be described as vertical, horizontal, or diagonal. A verticalspread has different strike prices but the same expiration date. A horizontal spread is the opposite: it contains the same strike price but different expiration dates. A diagonal spread has different strike pricesand different expirations. These three spreads are compared side byside in Figure 8–1
S T R I K E P R I C E S -
VERTICAL
DIAGONAL
HORIZONTAL
AUG
NOVEXPIRATION
FEB
MAY
MONTHS
Figure 8–1 Types of spreads.
By viewing the shape in each type of spread, you get an idea of howthese strategies can work. The spread is distinguished in other ways aswell. For example, a bull spread is one designed to work out profitablyif and when the value of the underlying stock rises. In comparison, abear spread is maximized when the underlying stock’s value declines.
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A box spread is the simultaneous opening of a bull spread and a bearspread. The use of any of these spreads depends on the direction ofprice movement you expected to see in the stock between the openingdate and the expiration date. However, because you must spendmoney (for long positions) or expose yourself to market risk (forshort positions), a spread—but for a few exceptions—is usually notappropriate for your conservative portfolio. The selection of longoptions whose premium is greater than the premium from any shortoptions in the spread is called a debit spread (in other words, you haveto pay money out to open the position). In the reverse situation—theuse of short positions exclusively, or of short positions whose totalpremium receipts are higher than the cost of long positions—is calleda credit spread.
Advanced Spread TerminologyThe terminology is even more complex than these basic definitions. Forexample, a ratio calendar spread is any spread in which the long andshort positions are not identical in numbers. As part of a complex rescue strategy, for example, you may open a series of long calls in thebelief the stock will rise, and you may also offset (or cover) a portion ofthose long calls by writing higher strike-price short calls. This reducesthe overall cost but still enables you to benefit from upward pricemovement. A ratio calendar combination spread involves a ratio of agreater number of long and short options with a box spread. A conservative use of options rarely employs this advanced strategy. However, itis possible to end up with complex strategies by opening a series of simpler option at various times. The point is that while you are wise toknow about the full range of option strategies, you probably will neveruse them.One final advanced spread is called the butterfly spread. This strategyhas three parts: open options within a strike-price range, offset by otheroptions at both higher and lower strike price ranges. The purpose ofthe butterfly is to limit losses in exchange for limited profits. It is difficult to justify such positions, and they often result from a series of lesscomplex decisions over a period of time and in reaction to price movement in the underlying stock.
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Straddle TechniquesWhile the spread involves variation of strike price, expiration date, orboth, the straddle by definition requires that strike price and expirationare the same. To open a straddle, you buy an equal number of calls andputs (a long straddle) or sell an equal number of calls and puts (a shortstraddle); in either case, the option positions would have the samestrike price and expiration date.With a long straddle, you experience a loss in the middle range, represented by a point spread on either side of the strike price, and profitseither above or below that range. For example, if the total cost of opening a long spread is 11 ($1,100), then the stock must move either up ordown by 11 points for you to break even. Anything beyond that rangeis profitable, and if the stock’s price remains within the 11-point rangeuntil expiration, the position becomes an overall loss. You can close oneside of the position without closing the other. For example, if the priceof the underlying stock moved up enough points to make the calls profitable, they could be closed, and the puts left open. The same argumentis true on the downside. Puts could be closed and calls left open. Inwriting a long straddle, the best possible outcome would be pricemovement in both directions, enough so that each side can be profitable in turn. The long straddle is highly speculative.
Short Straddles for Conservative Positionsand High Rates of ReturnThe short straddle involves opening two short positions with the samestrike price and expiration. An equal number of calls and puts produce amiddle-range profit zone with potential loss zones above and below. Forexample, if you receive a net premium of 9 by opening a short straddle,your profit zone is 9 points on either side of strike price; above or belowthat range, you face a loss zone. The troubling aspect of the short straddleis that you are always at or in the money on one side or the other, so exercise is an ever-present possibility. You can roll forward and up with theshort call to avoid exercise, and you can roll forward and down with theshort put. If you own shares of the underlying stock and you write nomore than one call per 100 shares, the risks in this position are minimal.Chapter 8 Combination Conservative Techniques
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However, if you do not own 100 shares, then the short straddle is a highrisk strategy because the call is uncovered.The short straddle is one variation of the contingency strategies covered in Chapter 6, “Alternatives to Stock Purchase.” It involves a contingent sale of stock you own (the covered call) with a contingentpurchase of additional shares (the uncovered put). Because premiumincome can be substantial in this combined strategy, the short straddlecan be a viable conservative strategy. Later in this chapter, we propose asimilar strategy with less risk, designed to maximize your returns without adding to market risk.
Long or Short PositionsThe obvious problem with advanced strategies is the high-risk attributes of each. Positions involving long calls and puts require substantialpoint movement; even in a net debit position (in which the cost exceedsthe receipt), you must fight against time value. Positions with any shortcalls or puts involve questions of market risk. Uncovered calls are thehighest risk position possible using options—clearly inappropriate in aconservative portfolio. Short puts may or may not be appropriateeither, depending on your opinion of the underlying stock, its fundamental strength, and whether or not you are willing to buy shares at theput’s strike price.When the mix between long and short positions is used, the possiblevariations of spreads and straddles present conservative possibilities.Some have already been introduced. For example, to remove the riskfactor from a ratio write, you can add a long call at the top of the strategy. If you own 300 shares, you might write four calls with a strike of50. You also buy a call at 55, 5 points above the strike price of the ratio.thus covering the uncovered short option. The net receipts from theshort calls come to $2,200, and the long call costs $100, so your net costbefore trading expenses is $2,100. The top-side long position is a formof market risk insurance; if the stock’s price were to rise so that all fourcalls were exercised, you could cover three of them with your 300shares; the remaining call is covered with your long 55 call. You wouldlose $500 on the difference between those strike prices. However, there
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are two mitigating factors. First, you received $2,100 for the overallratio write. Second, the $500 loss is preferable to the possibility of beingexercised and losing much more. This is a conservative use of optionsto manage a ratio write, transferring it from a potentially risky strategyto a very safe one.
Mixing the Long and the ShortAnother example using combinations of options is the opening of along call and a short put in a down market. This provides multiple benefits. First, the cost of the long call should be offset by the income fromwriting the short put. Second, if the stock declines further in value andthe short put is exercised, your basis in the stock is averaged down. Theaverage basis consists of the average price between original purchase ofshares and the strike price of newly acquired shares, minus put premium. Third, if the stock does rise, you can either close the call at a profitor exercise it and buy additional shares below market price, furtherreducing your average basis in the stock. This strategy—assuming youwould be satisfied if and when the short put was exercised—is veryconservative. It involves low cost or zero cost (in some cases, even asmall credit), and it is advantageous under any scenario of price movement. Even no movement would be satisfactory, considering that thecombined strategy is a zero-cost one.Using long puts to insure paper profits against the possibility of pricedecline is a sensible strategy by itself. But consider yet another variationcombining long and short options: the long put and short call combination. In this instance, you achieve downside protection in two ways.First, the long put would match in-the-money price movement dollarfor dollar. That put can be exercised and shares sold above market value,or it could be closed at a profit to take paper profits without sellingshares, a highly desirable attribute of the insurance strategy. Second, thecovered call offsets all or part of the long put cost, so that you end upwith free downside protection, and it may reduce your basis in the stockto the extent that the short premium of the call exceeds the long premium of the put. Remembering, too, that time works to the advantage ofthe short position, the covered call can be closed at a profit, allowed to
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expire worthless, or exercised. You can also roll forward and up to avoidexercise if the stock’s price continues to rise.These are only some examples of how you can continue to manage yourportfolio on a conservative basis using options in combination,enabling you to take appropriate action in three market conditions:1. In up markets, protecting or realizing paper profits withouthaving to sell stock.2. In low-volatility markets, increasing current income with covered calls.3. In down markets, averaging down your basis and turning paperlosses into paper profits or realized profits.
Theory Versus PracticeThe concept of using options in your long-term portfolio works as longas you structure that use within the guidelines of your conservative riskprofile and consider all possible outcomes. For example, whenever yougo short on either calls or puts, you should fully understand the consequences of exercise.The primary requirement for a conservative application of options isthat any and all strategies should involve stock that you have qualifiedunder your individual standards, that you either own or want to own,and that you consider an attractive long-term investment.Nonconservative option strategies tend to be overly complex and, whilethey may work out quite well on paper, they do not always produce thehigh rates of return that seem so easy. Stocks rarely move in the desireddirection, or quickly enough, for high-risk strategies to become profitable. Speculators—especially inexperienced ones—often pay toomuch attention to the profit potential of complex option combinationsand far too little to the associated high risks. In especially complexoption strategies, the minimal loss is often offset by a related minimalprofit as well. In calculating the cost of opening these positions, speculators often suffer a net loss due to trading expenses for opening andclosing the positions.
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Simplicity as a Worthy GoalOne conservative principle worth adopting is, Keep it simple. The fallback position for any option strategy is to return to the basic conservative theme: select high-quality growth stocks, and hold for the longterm, selling only if and when the fundamentals change. If any optionsstrategy is overly complex or difficult to understand, it should be avoided without exception. There are plenty of worthwhile conservativestrategies that you can use to contend with short-term paper profits,offset depressed markets, and employ for contingent purchase; you donot need to extend your risk range because a particular option strategywould require it.Risk analysis is an important and essential part of the informed optionstrategy. This is the process by which you determine whether or not aparticular strategy is appropriate, given the range of risks involved. Theanalysis also includes evaluating the outcomes that may occur, and thencomparing potential return to the potential market risk and other risks(lost opportunity risk, for example).In performing a risk analysis, the worst-case outcome has to be considered in deciding whether to proceed. Actual outcome comparisons aredifficult because one involves selling stock and another does not; so thepurpose of analyzing outcomes has to be to ensure that in any possibleevent, you are satisfied with that outcome. For example, if you arethinking about writing puts in a down market, the obvious worst-caseoutcome is a continued decline in the stock. Writing puts qualifies as aconservative strategy if you have already determined that• the stock is a good value at current levels.• the strike price would be attractive if the put were exercised.• premium income is high enough to justify the short position.• you will accomplish an attractive averaging down of your basisif the put is exercised.• you would like to acquire additional shares of the stock.If any of these features is not part of your conclusion, then writing putsmakes no sense.
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Worst-Case Outcome as a Desirable ResultThe worst case has to be viewed as desirable based on the standards youset for yourself. For example, what if your choices meet all of your criteria, but expiration is so far off that you are hesitant to tie up capitalfor that long? When you write short puts, you must have funds availablein the event of exercise, and there may be a lost opportunity risk associated with leaving funds on deposit. If another buying opportunityappears that you would like to take, you cannot make a move becausecapital is committed to the possibility of short-put exercise. If capital isunavailable (or if expiration is so far off that you simply don’t knowwhat you will want to do in a few months), you may want to reconsider writing the puts.The same worst-case analysis applies to writing short calls. You have toown 100 shares for each call you write (with the exception of the ratiowrite), or your market risks are unacceptably high. Is there a chanceyou will want to sell shares in the period between writing the call andexpiration? That possibility will be strongest if and when the stock’smarket value rises, which means the call premium value would be higher as well. Using the short call makes sense only when you are willing tokeep the position open until it is exercised, expires, or loses value sothat it can be closed at a profit.In your risk analysis, consider not only what might or might not takeplace in terms of profits in the open position, but also how the exposureand commitment to a particular strategy will affect your ability to makedecisions. If you conclude that being short in options is not well timedor, more likely, that the exposure period is too long, then reevaluateyour strategies. You may prefer to use shorter term options. In fact, astudy of annualized returns often reveals that more attractive annualized returns are achieved on options that expire sooner. In Chapter 7,“Option Strategies in Down Markets,” for example, we compared 2month and 5-month puts on Federal Express. The puts closest to current market value (80 and 75 puts) were better yielding in the 2-monthconfiguration than in the 5-month alternative. The two puts farther outof the money were better yielding in the 5-month mode. This disparitydemonstrates the correlation between time to expiration and timevalue premium and the importance of also checking annualized returns
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along with proximity between current market value and strike price.The question of annualized premium has to be weighed against theexposure period.
Tax Problems with Combination StrategiesThe complexity of combination strategies is only one of the problemsyou have to sort through. As a conservative investor, you may prefer forsimplicity, if only because basic conservative strategies involve fewerlikely risks. The possible tax consequences may also discourage youfrom involvement with complex strategies.Some forms of combinations create an unintentional wash sale, soprofits or losses you intend to recognize in one particular tax year couldbe disallowed. Any “offsetting position” that creates a straddle couldresult in the loss of long-term capital gains status for long stock. TheIRS definition of offsetting positions in which this could occur requiresa “substantial diminution of risk of loss” in order for the capital gainspenalty to apply. By definition, a conservative straddle makes sense onlyif it reduces your risk exposure, and under the tax rules, you do nothave to actually cover stock to fall within the definition of having anoffsetting position.
The Anti-Straddle Rule and Its EffectThe tax rules set up the potential consequence that the transaction willbe negated under the 30-day wash-sale rule. You could also lose longterm capital gains status on stock sold, and the deferral of deductionfor losses. If by definition a current-year loss is offset by a successorposition (a related second side of a straddle, for example), the lossescould be deferred and deducted from the basis in that successor position. This limitation applies to the loss on an option position, theexpense of executing transactions, and applicable margin interest.The so-called “anti-straddle rules” in the tax code are complex anddesigned to discourage the use of options to create current-year lossesand to offset future-year gains. However, the complexity of these rules
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may also discourage you from considering complex straddles as a viablepart in your conservative portfolio. The very complexity itself is a formof risk—we call it “tax complexity risk”—that makes advanced optionstroubling. A part of the risk to which you may be exposed is the unexpected loss of long-term gains status that, in some cases, could end upcausing substantially higher tax liabilities. Anyone who becomesinvolved with advanced options, including in-the-money covered callsor straddle positions, should first consult with a tax professional whounderstands the current tax rules and also question whether any use ofoptions that may complicate the tax status of long-term stock is worththe tax complexity risk. Even if you use expert help in preparing yourtax return and in planning investment income each year, the specialrules concerning these option transactions changes everything. Youmay not simply be able to pick a strategy and proceed, without alsoknowing how it will affect your tax status.
The Ultimate High-Return StrategyIt is wise to shun any strategies that are overly complex, unclear as torisk levels, or complex for tax purposes—which immediately disqualifies an array of possible option strategies: the distinction is clearbetween conservatism and outright speculation. By the same argument,there is also a difference between those who appreciate simplicity andthose who are attracted to the exotic, the complex, and the difficult tounderstand. Some option trading takes place for the enjoyment of thecomplexity rather than for a specific desire to create profits.One particular strategy is especially appealing because it creates animmediate return, it is not complicated, and market risks are notincreased. A straddle involves the simultaneous opening of a call and aput with identical strike prices and expiration dates. By modifying thestraddle, we can create a short position without also facing the near certainty of exercise. Instead of employing identical strike prices, weemploy out-of-the-money strikes to create a short combination madeup of covered calls and uncovered puts.
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A Review of Your Conservative AssumptionsIn order for the modified straddle to work, the following 10 rules mustbe observed:1. You are willing to accept exercise of the covered call. As with allconservative strategies involving short options, you must beprepared for exercise. If you are unwilling to face even theremote chance that the call could be exercised, then this strategy is not be a good fit for your portfolio.2. Exercise of the call will result in a profit in the stock. There isnever any reason to open a covered call position if exercisewould create a loss. Ensure that your basis in stock is lowerthan strike price of the call. The farther the gap between basisand strike, the better.3. You are willing to accept exercise of the uncovered put. You alsoneed to acknowledge that the short put could be exercised. Thestrike price of the put should represent a desirable buy price forthe stock, in your opinion. For example, if your portfolio strategy calls for purchasing more shares of the stock if the pricefalls adequately to become a bargain, you achieve the same outcome by selling a put.4. You have funds available to buy shares if and when the put isexercised. Your broker requires that you have funds available tocomplete this transaction if the put is exercised. Even if you usemargin and can complete this option position for only a portion of the possible price of the stock, you still have to leavefunds on deposit.5. You consider the put’s strike price a good price for stock. The put’sstrike price should, in your opinion, be a desirable price. Thisreduces the chance of exercise; even if exercise does occur, youwould expect the stock to return to its established range abovethat support level.6. The strike prices are selected with the stock’s trading range in mind.Your review of this strategy should be coordinated with a studyof the stock’s recent trading range history. The ideal situation is
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