Trading Strategies Involving Options
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Transcript of Trading Strategies Involving Options
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11.1
Trading Strategies Involving Options
Chapter 11
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11.2
Three Alternative Strategies
Take a position in the option and the underlying asset
Take a position in 2 or more options of the same type, i.e. all calls or all puts (spread)
Combination: Take a position in a mixture of calls & puts (combination)
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11.3
Positions in an option & the underlying stock (put-call parity)
Profit
STK
Profit
ST
K
Profit
ST
K
Profit
STK
(a) Short put (b) Long put
(c) Long call (d) Short call
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11.4
Bull Spread Using Calls(buy low K, sell high K)
K1 K2
Profit
ST
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11.5
Bull Spread Using Puts(buy low K, sell high K)
K1 K2
Profit
ST
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11.6
Bear Spread Using Puts(buy high K, sell low K)
K1 K2
Profit
ST
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11.7
Bear Spread Using Calls (buy high, sell low K)
K1 K2
Profit
ST
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11.8
Box Spread
A combination of a bull call spread and a bear put spread
Payoff diagram looks like a box If all options are European a box spread is
worth the present value of the difference between the strike prices
If they are American this is not necessarily so
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11.9
Butterfly Spread Using Calls(buy lowest and highest K, sell 2 intermediate K)
K1 K3
Profit
STK2
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11.10
Butterfly Spread Using Puts(buy highest and lowest K, sell 2 intermediate K)
K1 K3
Profit
STK2
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11.11
Calendar Spread Using Calls(short short, long long; at short maturity date) Result looks like a butterfly spread
Profit
STK
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11.12
Calendar Spread Using Puts (short short, long long; at short maturity date) Result looks like a butterfly spread
Profit
STK
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11.13
A Straddle Combination: long call and put (same K, same expiry)
Profit
STK
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11.14
Strip (2 puts, 1 call) & Strap (2 calls, 1 put)
Profit
K ST
Profit
K ST
Strip Strap
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11.15
A Strangle: similar to straddle but call K > put K
K1 K2
Profit
ST
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11.16
Strangle not!: what if call K < put K?
K1 K2
Profit
ST