ankit & vishal rm

7/31/2019 Ankit & Vishal RM

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Submitted to:

SARDAR PATEL COLLEGE OF ADMINISTRATION & MANAGEMENT

(SPCAM-MBA)

AFFILIATED WITH GUJARAT TECHNOLOGIACAL UNIVERSITY, AHMEDABAD

Prepared by:Vishal H Patel Ankit B PatelEnrl No.:107550592018 Enrl No.:107550592024MBA-II (2010-2012) MBA-II (2010-2012)

PRESENTATION

ON

TRADING STRATEGIES INVOLVING OPTIONS


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8.2

Three Alternative Strategies

Take a position in the option & theunderlying

Take a position in 2 or moreoptions of the same type (Aspread)

Combination: Take a position in amixture of calls & puts (Acombination)


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8.3

a) LONG POSITION IN A STOCK + SHORT A CALL

b) SHORT POSITION IN A STOCK + LONG A CALL

c) LONG POSITION IN A STOCK + LONG A PUT

d) SHORT POSITION IN A STOCK + SHORT A PUT

DIFFERENT WAYS OF PROTECTIVE

INVESTMENT (COVERED)


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Options, Futures, and Other Derivatives, 4th edition 1999 by John C. Hull

8.5Positions in an Option & the

Underlying

Profit

STX

Profit

ST

X

Proft

ST

X

Profit

ST

X

(a)(b)

(c) (d)


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8.6

SPREADS

A spread strategy involves taking a position in 2 or more options

of the same type (2 or more calls or 2 or more puts)

BULL SPREADS (hoping for a increase)

BEAR SPREADS (hoping for a decrease)

BUTTERFLY SPREADS (hoping for no major move)


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8.7

BULL MARKET


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8.8

BEAR MARKET


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8.9

WHICH ONE OF THE 2 CALLS IS HIGHER ?

MARCH 30 CALL OR MARCH 35 CALL ?

MARCH 30, because strike price is lower

THE LOWER THE STRIKE PRICE, THE HIGHER THE CALL PRICE FOR THE SAME

MATURITY


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8.10

BULL SPREADS

Buying a call option with a certain strike price and

selling a call option with a higher strike price

(Example : Buy a march 30 call and sell a March 35 call)

Value of purchased call > Value of sold call

Requires an initial investment


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8.11

Bull Spread Using Calls

X1 X2

Profit

ST


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8.12EXAMPLE (bull spreads using calls)

A trader buys a Home depot (HD) 30 Call at $5 and sells aHD 35 Call at $3.

Cash Flow : $-2

If St 30 Profit = $-2

30


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8.13

BULL SPREADS

USING PUTSBuying a put option with a low strike price and selling a put option

with a high strike price

(Example : Buy a march 30 put and sell a March 35 put)

Value of purchased put < Value of sold put

PROVIDES A POSITIVE CASH FLOW


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8.14

Bull Spread Using Puts

X1 X2

Profit

ST


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8.15EXAMPLE( bull spread using puts)

A trader buys a HD 30 Put at $5 and sells a HD 35Put at $8

Cash Flow : $3

If S0 30 Profit = $-2

30


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8.16

BEAR SPREADS

A trader entering into a bear spread is hoping that the stock price

will decrease.

Buying a call option with a certain strike price and selling a call optionwith a lower strike price

(Example : Buy a March 35 call and sell a March 30 call)

Value of purchased call < Value of sold call

A bear spread limits the traders upside potential as well

as downside risk


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8.17

Bear Spread Using Calls

X1 X2

Profit

ST


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8.19

Bear Spread Using Puts

X1 X2

Profit

ST


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8.20EXAMPLE (Bear spreads using puts)

A trader buys a HD 35 Put at $3 and sells a HD 30Put at $1

Cash Flow : -$2

If S0 30 Profit = $3

30


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8.21BUTTERFLY SPREADSAButterfly spreadinvolves positions in options with 3 different strike

prices.

BUY 1 CALL WITH A LOW STRIKE PRICE X1.

BUY 1 CALL WITH A HIGH STRIKE PRICE X3SELL 2 CALL OPTIONS WITH A STRIKE PRICE X2

(usually X2 is close to the stock price)

PROFIT IF THE STOCK PRICE STAYS CLOSE TO X2

APPROPRIATE STRATEGY IF NO LARGE

MOVEMENT IS EXPECTED IN EITHER DIRECTION


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8.22

Butterfly Spread Using Calls

X1 X3

Profit

STX2


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8.23

EXAMPLE

Suppose S0= $61 and you dont expect any major move in either

direction in the next 6 months (you trade with 6 month away options)

What strike price would you chose in considering a butterfly

spread using calls ?

BUY ONE 55 CALL OPTION

BUY ONE 65 CALL OPTION

SELL TWO 60 CALL OPTION


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8.24

BUY 55 CALL AT $10

SELL TWO 60 CALLS AT $7

BUY 65 CALL AT $5

WHAT IS THE COST OF THIS BUTTERFLY SPREAD ?

-10 + 14 - 5 = -1


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8.25

IF S0 > $65, THEN NET PROFIT IS -1

IF S0 < $55, THEN NET PROFIT IS -1

The ideal situation is when S0 is at $60 at expiration of theOptions. Profit is then :

$4

A profit is realized if 55


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8.26

DONT FORGET..WHEN TO USE BUTTERFLY

SPREAD

WHEN YOU THINK THE MARKET WILL NOT MOVE

VIOLENTLY IN ANY DIRECTION


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8.27

Butterfly Spread Using Puts

X1

X3

Profit

STX2


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8.28

COMBINATIONS

A Combination is an option trading strategy that involves taking

a position in both calls and puts on the same stock.

STRADDLES STRANGLES


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8.29

STRADDLES

A straddle is appropriate when a trader

expects a large movement but doesnt know in

which direction

BUYING A CALL AND A PUT

SELLING A CALL AND A PUT


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8.30EXAMPLESuppose S0 trades at $69 and a trader expects a strong move in either

direction (takeover or earning disappointment).

The trader could create a 3 months straddle buy:

NET COST IS :$7

Buying a call 70 at $4Buying a put 70 at $3

BREAKEVEN POINTS : $77 and $63


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8.31

A Straddle Combination

Profit

ST

X


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8.32

STRANGLES

In a Strangle, a trader buys a put and a call with different strike prices,but same expiration dates. The Call strike price is higher than the Put

strike price.

BUYS A MARCH 35 CALL

BUYS A MARCH 30 PUT

LESS EXPENSIVE THAN A STRADDLE

Profit depends on how far apart the strike prices are

The farther apart they are, the less downsize risk , and the further the stock price has to

move for a profit to be realized.


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8.33

A Strangle Combination

X1 X2

Profit

ST


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