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Lecture 4. Bullish StrategiesRiskReward Call purchaselimitedunlimited Synthetic long stockunlimitedunlimited Bull spreadlimitedlimited Protective Putlimitedunlimited.

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Presentation on theme: "Lecture 4. Bullish StrategiesRiskReward Call purchaselimitedunlimited Synthetic long stockunlimitedunlimited Bull spreadlimitedlimited Protective Putlimitedunlimited."— Presentation transcript:

1 Lecture 4

2 Bullish StrategiesRiskReward Call purchaselimitedunlimited Synthetic long stockunlimitedunlimited Bull spreadlimitedlimited Protective Putlimitedunlimited Bullish calendar spreadlimitedunlimited Covered callunlimitedlimited Naked put writeunlimitedlimited

3 Bearish StrategiesRiskReward Put purchaselimitedunlimited Synthetic Putlimitedunlimited Synthetic short saleunlimitedunlimited Bear spreadlimitedlimited Covered put writeunlimitedlimited Bearish calendar spreadlimitedunlimited Naked call writeunlimitedlimited

4 Long Stock, Short Call

5 Profit = S + call - P BE = P - call

6 Long Stock, Long Put

7 Profit = P - put - S

8  Short Stock, Long Call

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10  Short Stock, Short Put

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12  Short Put, Long Call

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15  Long Call @ s1 s1 < s2  Short Call @ s2  Max Profit = s2 - s1 - c1 + c2  Break Even = s2 - MP = s1 - c2 + c1

16 Example Price = 32Oct35C = 1t=60days/365 Oct30C = 3v =.24 Buy Oct30C = -3 Sell Oct35C = +1 Max Profit = 35-30-3+1 = 3 BE = 30-1+3 = 32 Net Debit = -3 + 1 = -2

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21  Profit / Loss Diagram Table

22  Compute probability of bull spread Example V t =.24 (60/365).5 =.097 Prob (<32) = N[ln(32/32) /.097] =.5000 Prob (>32) = 1 -.500 =.5000 Max Profit = $300 Max Loss = -$200 at 50% odds, makes good sense

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24  s1 < P << s2  Good probability, good profit potential

25  P < s1 < s2  Small Cost, high profit, low prob

26  S1 < s2 < P  Low profit, high prob

27 Long Put @ s1 s1 < s2 Short put @ s2 example (Credit Spread) Price = 55 Jan50P = 2 Jan60P = 7 Net Credit = p2 - p1 = + 7 - 2 = + 5 Break Even = S2 - credit = 60 - 5 = 55

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31 Short Call @ s1 s1 < s2 Long Call @ s2credit spread

32 Short Call @ s1 s1 < s2 Long Call @ s2credit spread Example P = 55Jan60C = 2Jan50C = 7 Net Credit = 7 - 2 = 5BE = 50 + 5 = 55

33 Short Call @ s1 s1 < s2 Long Call @ s2credit spread Example P = 55Jan60C = 2Jan50C = 7 Net Credit = 7 - 2 = 5BE = 50 + 5 = 55

34 Long Put @ s1 s1 > s2 Short Put @ s2debit spread

35 Long Put @ s1 s1 > s2 Short Put @ s2debit spread Example P = 55Jan50P = 2Jan60P = 7 Net Debit = 7 - 2 = 5BE = 60 - 5 = 55

36 Long Put @ s1 s1 > s2 Short Put @ s2debit spread Example P = 55Jan50P = 2Jan60P = 7 Net Debit = 7 - 2 = 5BE = 60 - 5 = 55

37 +Credit spread - assignment risk ? What causes assignment -Large Credit = P well above lower strike Example: p = 59, Jan60C=1, Jan50C=9

38 Long Stock, Long Call, Short 2 Calls Example Own stock @ $48 Price = 42 Oct40Call = 4 (buy) Oct45Call = 2 (sell 2) Net Credit = 0 BE = 44

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44 PriceP/LStP/L Sh CP/L Lg CNet P/L 35-1300+400-400-1300 38-1000+400-400-1000 40-800+400-400-800 42-600+400-200-400 44-400+40000 45-300+400+100+200 480-200+400+200 50+200-600+600+200

45 If call is deep in the money and has no time to exp, a bull spread can be used to simulate a covered call. Example Price = 49 Sell Apr50C = 3 Buy Apr35C = 14

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47 A neutral position that combines both a bear spread and a bull spread Long call @ s1s1 < s2 < s3 Short 2 calls @ s2 Long call @ s3 Example Price = 60 buy July50C = 121200 debit short2 July60C = 61200 credit buy July70C = 3 300 debit 300 Net Debit

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52 Multiple ways to create the butterfly spread example Strike506070 Call1262 Put1511 Butterfly PositionsNet Position Buy 50C / sell 2 60C / buy 70C2 debit Buy50C/sell 60C/buy70P/sell60P12 debit Buy50P/sell60P/Buy70C/sell60C8 credit Buy50P / sell 2 60P / buy 70P2 debit

53 Long stock, short multiple calls example 2:1 ratio call write Price = 49 Oct50C = 6 sell 2 calls and long 100 stock

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55 example 2:1 ratio call write Price = 49 Oct50C = 6 sell 2 calls and long 100 stock Price drops to 40 Oct50C = 1 Oct40C = 4 Buy 2 Oct50C = profit = 12 - 2 = 10 Sell 2 Oct40C apply to stock price & pretend we own stock at $39

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57 Max Profit = m(S-P) + nCm = # stock lots Upside BE = S + MP/(n-m)n = # of Call ks Downside BE = S - MP / m Example Max Profit = 1 (50-49) + 2 (6) = 13 Upside BE = 50 + 13/ (2-1) = 63 Downside BE = 50 - 13/1 = 37

58 Example 3:1 Buy 1 lot stock @ 49 sell 3 oct50c@18 Max Profit = 1 (50-49) + 3 (6) = 19 Upside BE = 50 + 19/ (3-1) = 59.5 Downside BE = 50 - 19/1 = 31

59 Example 3:1 Buy 1 lot stock @ 49 sell 3 oct50c@18 Max Profit = 1 (50-49) + 3 (6) = 19 Upside BE = 50 + 19/ (3-1) = 59.5 Downside BE = 50 - 19/1 = 31

60 Long stock, s1 < P < s2 short in money call (s1), short out of money call (s2) Max Profit = c1 + c2 + s1 - P Downside BE = s1 - MP Upside BE = s2 + MP Example Price = 65 Oct60C = 8 Oct70C = 3

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64 Don’t do - because

65 Long call @ s1s1 < s2 Short X calls @ s2 Example 2:1 Price = 44 Apr40C = 5buy 1 Apr45C = 3sell 2 BE = 51 MP = 6

66 Step 1

67 Step 2

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70 3:1 example increase profit lower BE 2:1

71 3:1 example increase profit lower BE 3:1

72 Short Put Short Call Example Price = 45 Jan45C = 4 Jan45P =3

73 Same Example - But, sell 4 of each Price = 45 Jan45C = 4 Jan45P =3

74 Long Stock Short Call Short Put example Price = 51buy 100 shares Jan50C = 5sell 1 call Jan50P = 4sell 1 put Max Profit = Premium + S - P = 9 + 50 - 51 = 8 BE = (P+S-Prem)/2 = 46

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77 Short put (out of money) Short call (out of money) example price = 65 Jan70C = 4 Jan60P = 3 Downside BE = Sp - put - call = 60-3-4 = 53 Upside BE = Sc + put + call = 70+3+4 = 77 Max Profit = put + call = 3+4 = 7

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79 same example price = 65 (price rises to 70) Jan70C = 4 Jan60P = 3Put falls to 1 Jan70P = 4 action: buy back the 60 put & sell the 70 put

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83 Short out of money put Long out of money call example (Bullish Strike Split) price = 53 Jan50P = 2 Jan60C = 1 BE = 48

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86 Short near term option Long distant term option example (Bull Calendar Spread) Price = 50 TodayApr50C = 5 short = +5 (Jan) July50C = 8 long = -8 Net Debit = -3 Price = 50 AprilApr50C = 0 July50C = 5

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89 Price Apr50C/PLJuly50C/PLNet Profit 400/+500.5/-750-250 450/+5002.5/-550-50 480/+5004/-400+100 500/+5005/-300+200 522/+3006/-200+100 555/08/00 6010/-50010.5/+250+250

90 Same as call short near term & long distant term ex - price = 50, Jan50P = 2, Apr50P = 3

91 Opposite of all other common positions Example (Reverse ratio - backspread) 2:1 Short call @ s1 s1 { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/3408331/12/slides/slide_90.jpg", "name": "Opposite of all other common positions Example (Reverse ratio - backspread) 2:1 Short call @ s1 s1

92  Step 1

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95 diff strikes & diff exp example (Diagonal Bull Spread) Price = 32 Apr30C = 3 Apr35C = 1 July30C = 4Long July30C July35C = 1.5Short Apr35C Normal Bull Spread -Long Apr30C Short Apr35C

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