trading strategies involving options chapter 10
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Trading Strategies Involving Options Chapter 10. Positions in an Option & the Underlying. Buy or sell call Buy or sell put buy or short sell stock buy (lend at) or sell (borrow at) risk-free bond (rate). Trading Strategies Involving Options. Take a position in the option & the underlying - PowerPoint PPT PresentationTRANSCRIPT
10.2
Positions in an Option & the Underlying
• Buy or sell call
• Buy or sell put
• buy or short sell stock
• buy (lend at) or sell (borrow at) risk-free bond (rate)
10.3
Trading Strategies Involving Options
• Take a position in the option & the underlying
• Spread: Position in 2 or more options of the same type
• Combination: Position in a mixture of calls & puts
10.7Payoff for Investing or Borrowing PV(X) in
Risk-Free Bond
buy
sell
ST
X
-X
Cost = Xe-rT
Cost = -Xe-rT
10.8
Method
• Determine cost of portfolio
• Draw payoff pattern for each position
• Add patterns together to obtain payout pattern
• Subtract cost of portfolio to obtain profit pattern
10.13
Bull Spread
• Buy 1 call and sell 1 call at higher strike
buy
sell
STX1
Cost = c1 - c2 > 0
X2-X1
X2
10.15
Bear Spread
• Sell 1 call and buy 1 call at higher strike
buy
sell
STX1
Cost = c1 - c2 < 0
X2-X1
X2
10.17
Buy a Straddle
• Buy 1 call and 1 put at same strike
X
Cost = c + pX
-p-c
X-p-c X+p+c
profit
payout
10.18
Butterfly Spread• Buy 1 call at X1, sell 2 calls at X2, buy 1 call
at X3
m = +1
m = - 2
m = -1
Cost = c1 - 2c2 + c3
X1
X2
X3
m = 0
10.19
Butterfly Spread• Buy 1 call, sell 2 calls, buy 1 call
Cost = c1 - 2c2 + c3
X2-X1 payoff
profitcost
10.29
Summary• Write covered call: buy stock sell call
• Protective put: buy stock and buy put
• Bull spread: buy X1 call and sell X2 call
• Bear spread: opposite of bull
• Buy Straddle: buy X call and buy X put
• Sell Straddle: opposite of buy straddle
• Strangle: buy X1 put and buy X2 call
• Butterfly spread: buy 1 X1 call, sell 2 X2 calls, and buy 1 X3 call
10.30
Payoff Table
• Identify critical price ranges
• For each position determine payoff in each critical range
• Sum payoffs across each critical range