Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.1

Trading Strategies Involving Options

Chapter 10

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.2

Three Alternative Strategies

Take a position in the option and the underlying

Take a position in 2 or more options of the same type (A spread)

Combination: Take a position in a mixture of calls & puts (A combination)

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.3

Positions in an Option & the Underlying (Figure 10.1, page 230)

Profit

STK

Profit

ST

K

Profit

ST

K

Profit

STK

(a) (b)

(c)

(d)

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.4

Bull Spread Using Calls(Figure 10.2, page 231)

K1 K2

Profit

ST

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.5

Bull Spread Using PutsFigure 10.3, page 233

K1 K2

Profit

ST

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.6

Bear Spread Using PutsFigure 10.4, page 233

K1 K2

Profit

ST

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.7

Bear Spread Using CallsFigure 10.5, page 234

K1 K2

Profit

ST

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.8

Butterfly Spread Using CallsFigure 10.6, page 237

K1 K3

Profit

STK2

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.9

Butterfly Spread Using PutsFigure 10.7, page 238

K1 K3

Profit

STK2

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.10

Calendar Spread Using CallsFigure 10.8, page 238

Profit

STK

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.11

Calendar Spread Using PutsFigure 10.9, page 239

Profit

STK

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.12

A Straddle CombinationFigure 10.10, page 240

Profit

STK

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.13

Strip & StrapFigure 10.11, page 241

Profit

K ST

Profit

K ST

Strip Strap

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.14

A Strangle CombinationFigure 10.12, page 242

K1 K2

Profit

ST

Fundamentals of Futures and Options Markets, 6th Edition, Copyright © John C. Hull 2007 10.15

Suggested Practice Problems:

All Quiz Questions (10.1 – 10.7)10.1010.1210.1510.17