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10.1 Trading Strategies Involving Options Chapter 10.

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Presentation on theme: "10.1 Trading Strategies Involving Options Chapter 10."— Presentation transcript:

1 10.1 Trading Strategies Involving Options Chapter 10

2 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)

3 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

4 10.4 Payoff for Put Option X x buy sell STST -X Cost = p Cost = -p

5 10.5 Payoff for Call Option X x buy sell STST Cost = c Cost = -c

6 10.6 Payoff for Stock buy STST sell Cost = S Cost = -S

7 10.7 Payoff for Investing or Borrowing PV(X) in Risk-Free Bond buy sell STST X -X Cost = Xe -rT Cost = -Xe -rT

8 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

9 10.9 Write a Covered Call X sell call STST buy stock X Cost = S - c

10 10.10 Profit Pattern for Covered Call X STST X Cost = S - c X-S+c -S+c

11 10.11 Payoff for Protective Put X x STST Cost = S + p

12 10.12 Profit Pattern Protective Put x STST Cost = S + p X-S-p S+p X

13 10.13 Bull Spread Buy 1 call and sell 1 call at higher strike buy sell STST X1X1 Cost = c1 - c2 > 0 X 2 -X 1 X2X2

14 10.14 Profit Pattern for Bull Spread STST X 2 -X 1 -c1+c2 -c1+c2

15 10.15 Bear Spread Sell 1 call and buy 1 call at higher strike buy sell STST X1X1 Cost = c1 - c2 < 0 X 2 -X 1 X2X2

16 10.16 Profit Pattern for Bear Spread STST X1X1 Cost = c1 - c2 < 0 X2X2

17 10.17 Buy a Straddle Buy 1 call and 1 put at same strike X Cost = c + p X -p-c X-p-c X+p+c profit payout

18 10.18 Butterfly Spread Buy 1 call at X 1, sell 2 calls at X 2, buy 1 call at X 3 m = +1 m = - 2 m = -1 Cost = c1 - 2c2 + c3 X1X1 X2X2 X3X3 m = 0

19 10.19 Butterfly Spread Buy 1 call, sell 2 calls, buy 1 call Cost = c1 - 2c2 + c3 X 2 -X 1 payoff profit cost

20 10.20 Bull Spread Using Calls Figure 10.2 X1X1 X2X2 Profit STST

21 10.21 Bull Spread Using Puts Figure 10.3 X1X1 X2X2 Profit STST

22 10.22 Bear Spread Using Calls Figure 10.4 X1X1 X2X2 Profit STST

23 10.23 Bear Spread Using Puts Figure 10.5 X1X1 X2X2 Profit STST

24 10.24 Butterfly Spread Using Calls Figure 10.6 X1X1 X3X3 Profit STST X2X2

25 10.25 Butterfly Spread Using Puts Figure 10.7 X1X1 X3X3 Profit STST X2X2

26 10.26 A Straddle Combination Figure Profit STST X

27 10.27 Strip & Strap Figure Profit XSTST XSTST StripStrap

28 10.28 A Strangle Combination Figure X1X1 X2X2 Profit STST

29 10.29 Summary Write covered call: buy stock sell call Protective put: buy stock and buy put Bull spread: buy X 1 call and sell X 2 call Bear spread: opposite of bull Buy Straddle: buy X call and buy X put Sell Straddle: opposite of buy straddle Strangle: buy X 1 put and buy X 2 call Butterfly spread: buy 1 X 1 call, sell 2 X 2 calls, and buy 1 X 3 call

30 10.30 Payoff Table Identify critical price ranges For each position determine payoff in each critical range Sum payoffs across each critical range

31 10.31 Example: Straddle Payoff Action:S T < XS T X Buy Call0S T - X Buy PutX - S T 0 PortfolioX - S T S T - X


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