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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull !1"

Trading StrategiesInvolving Options

Chapter 11

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Strategies to be Considered

Bond plus option to create principalprotected note

Stock plus optionTwo or more options of the same type

(a spread)Two or more options of different types

(a combination)

Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

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Principal Protected Note

Allows investor to take a risky positionwithout risking any principal

!ample" #1$$$ instrument consisting of %&year 'ero&coupon bond with principal of

#1$$$ %&year at&the&money call option on a stock

portfolio currently worth #1$$$

Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

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Principal Protected Notes continued

iability depends on evel of dividends

evel of interest rates olatility of the portfolio

ariations on standard product *ut of the money strike price Caps on investor return +nock outs, averaging features, etc

Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

Positions in an Option & the

Underlying (Figure 111! page "#$%

-rofit

STK

-rofit

ST

K

-rofit

ST

K

-rofit

ST

K

(a)(b)

(c

)

(d

) 5

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

ull Spread Using Calls(Figure 11"! page "#'%

K1

K2

-rofit

ST

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

ull Spread Using PutsFigure 11! page "#)

K1

K2

-rofit

ST

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

ear Spread Using PutsFigure 11*! page "+,

K1

K2

-rofit

ST

8

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

ear Spread Using CallsFigure 11#! page "+1

K1

K2

-rofit

ST

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

o- Spread

A combination of a bull call spread and abear put spread

.f all options are uropean a bo! spread isworth the present value of the differencebetween the strike prices

.f they are American this is not necessarilyso (see Business Snapshot 11/1)

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

utter.ly Spread Using CallsFigure 11+! page "+

K1

K3

-rofit

ST

K2

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

utter.ly Spread Using PutsFigure 11$! page "+*

K1

K3

-rofit

ST

K2

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

Calendar Spread Using CallsFigure 11'! page "+#

-rofit

ST

K

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

Calendar Spread Using PutsFigure 11)! page "+#

-rofit

ST

K

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

/ Straddle Co0binationFigure 111,! page "++

-rofit

ST

K

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

Strip & Strap

Figure 1111! page "+$

-rofit

K ST

-rofit

K ST

Strip Strap

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Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

/ Strangle Co0binationFigure 111"! page "+'

K1

K2

-rofit

ST

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Other Payo.. Patterns

0hen the strike prices are close togethera butterfly spread provides a payoffconsisting of a small spike2

.f options with all strike prices wereavailable any payoff pattern could (at leastappro!imately) be created by combiningthe spikes obtained from different butterflyspreads

Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright John C. Hull!1"

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