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Understanding LEAPS: Using the Most Effective Options Strategies for Maximum Advantage by Allaire

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CHAPTER 7Buy Stock, Buy Call Ratio Spread

In Chapter 5 we looked at the upside of leveraging (returns are magnified in a rising market) and also the downside (losses are magnified in a falling market). One of the unfortunate conclusions was that leverage works both ways. In the best of all possible worlds, one would like to be able to benefit from the impact of leveraging in bull markets, while not having to assume double the risk in bear markets. Mission impossible? Not quite, if one is willing to accept some restrictions.

In this chapter we will look at an option strategy that meets this objective, provided traders accept the limitation that the strategy creates this favorable risk-reward profile over only a limited range. Let us illustrate ...

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