derivatives. introduction cash market strategies are limited long (asset is expected to appreciate)...
DESCRIPTION
Derivatives Securities whose price is derived from other assets Payoff depends on the value of other securities Examples Futures futures VIX futures Call options Put options Digital options Collar ……..TRANSCRIPT
DERIVATIVES
IntroductionCash market strategies are limited
Long (asset is expected to appreciate)Short (asset is expected to depreciate)
Alternative viewsAppreciation within a rangeDepreciation within a rangeAppreciation outside a range Depreciation outside a rangeAppreciation with protection against
depreciation …..
DerivativesSecurities whose price is derived from other
assetsPayoff depends on the value of other securitiesExamples
Futures futuresVIX futuresCall optionsPut optionsDigital optionsCollar……..
Option ContractCall option gives the buyer the right (not
the obligation) to buy an asset for a certain price before some specified time
Put option gives the buyer the right (not the obligation) sell an asset for a certain price before some specified time
Exchange Traded Over The Counter (OTC)
Underlying AssetsEquityCommodityForeign Exchange Indexes
S&PVolatility VIX
FuturesInterest rate
CapFloorCollarCorridorSwaps (flat forward)
Payoff Profile & Profit of Long Call
Payoff of a long Call option at expiration with strike of S with X the price of underlying = Max ( 0, X –S )
$ payoff Profit
& Loss (P&L)
S Asset Price
Payoff Profile & Profit of Short Call
Payoff of a short Call option at expiration with strike of S with X the price of underlying = Min ( 0, S – X )
$ S Asset Price Payoff Profit & Loss (P&L)
Payoff Profile & Profit of Long Put
Payoff of a long Put option at expiration with strike of S with X the price of underlying = Max ( 0, S - X )
$ payoff
S Asset Price
Profit & Loss (P&L)
Payoff Profile & Profit of Short Put
Payoff of a short Put option at expiration with strike of S with X the price of underlying = Min ( 0, X – S )
$ Profit & Loss (P&L) S Asset Price Payoff
Option vs StockOption is a leveraged position in stock Stock price=$90Premium of one year call with strike of $90 =
$10Interest rate = 2%Funds to invest = $9,000Investment Alternatives
Portfolio A: Buy 100 shares of stock (unlevered position) for $9,000
Portfolio B: Buy 900 calls (highly levered position)Portfolio C: Purchase 100 calls, invest remaining
$8,000 at 2%
Values of PortfoliosValues of portfolios for different stock
price in one year
Portfolio
$85 $90 $95 $100 $105 $110
A) 100 shares
$8500 $9000 $9500 $10,000 $10,500 $11,000
B)900 Calls
0 0 $4,500 $9,000 $13,500 $18,000
C)100 Call + Deposit
$8160 $8160 $8,600 $9,160 $9,660 $10,160
Performance of PortfoliosValues of portfolios for different stock
price in one year
Portfolio
$85 $90 $95 $100 $105 $110
A) 100 shares
-5.56% 0.00% 5.56% 11.11% 16.67% 22.22%
B)900 Calls
-100% -100% -50% 0% 50% 100%
C)100 Call + Deposit
-9.33% -9.33% -3.78% 1.78% 7.33% 12.89%
Option StrategiesCombination of options can be used to
achieve certain investment objectives are not available using the cash market
Protective Put Long Stock, Long Put Stock
Put Payoff
Performance of Protective Put + Stock
Buying insurance on stock position Stock
Put Payoff
Covered Call Long Stock, Short Call Stock
Short Call Payoff
Performance of Covered Call Long Stock, Short Call Stock
Put Payoff
Long Straddle Long Call, Long Put with same strike
Long Straddle Payoff Long Call, Long Put with same strike
Short Straddle Short Call, Short Put with same strike
Short Straddle Payoff Short Call, Short Put with same strike
Long Strangle Long Call, Long Put with different strikes
Long Strangle Payoff Long Call, Long Put with different strikes
Short Strangle Short Call, Short Put with different strikes
Short Straddle Payoff Short Call, Short Put with different strikes
CollarLong Stock, Short Call, Long Put with different
strikes
Collar PayoffLong Stock, Short Call, Long Put with different
strikes
Put-Call-Parity
C = P + S – PV(X)