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VIII: Options 25: Options Strategies II

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar Hedging strategy on long shares Long 10,000 GE

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Chapter 25: Options Strategies Long 10,000 GE Value © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar Hedging strategy on long shares Long 10,000 GE Place a Protective Put below the current market price of GE (out-of-the-money puts) 100 $30 June Put contracts @ 0.75 $7500.

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Chapter 25: Options Strategies Long GE with a Protective Put © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar Hedging strategy on long shares Long 10,000 GE Place a Protective Put Generate $7500 by writing an out-of-the- money call $45 June Call @ $1.75 Short 43 contracts

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Chapter 25: Options Strategies Long GE with a Collar © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collar strategies Should the collar use a $45 or $60 Call? Generate $7500 by writing an out-of-the- money call $45 June Call contracts @ $1.75 43 contracts → $7525 $60 June Call contracts @ $0.75 100 contracts → $7500

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Chapter 25: Options Strategies Long GE with a Collar © Oltheten & Waspi 2012

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Chapter 25: Options Strategies Other Options © Oltheten & Waspi 2012

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Chapter 25: Options Strategies Interest Rate Options Strike Price CallPuts DecJanMarDecJanMar 40 5.706.456.50.95.25 45 3.301.952.30.500.60.75 50.90.251.153.603.201.80 55.35.101.853.008.504.00 60.350.658.0013.20 65.6518.40 70.1023.60 © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Interest Rate Options Buy March 60 call @ 0.65 Pay $65 ($100 * 0.65)

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Barings Bank Queen’s Bank Bankrupt and collapsed in February 1995 due to the actions of one derivatives trader in Barings Securities Singapore

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Index Options Index options are contracts defined as money times an index. $100 * S&P500 (CBOE) Nikkei 225 index Options SIMEX (Singapore) OSE (Osaka) Index Options are generally European © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Nikkei 225 Option Example Buy a 14,000 Jan call at 12 Pay ¥ 12,000 ($120) for the right to purchase the Nikkei at ¥ 14,000,000 ($140,000) in January If in January the Nikkei 225 is at 14,200 Exercise (profit of ¥ 200,000 ($2,000)) If in January the Nikkei 225 is at 13,900 Expires worthless © Oltheten & Waspi 2012

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Chapter 25: Options Strategies Nikkei 225 Call © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Nikkei 225 Option Example Buy a 14,000 Jan put at 12 Pay ¥ 12,000 ($120) for the right to purchase the Nikkei at ¥ 14,000,000 ($140,000) in January If in January the Nikkei 225 is at 14,200 Expires worthless If in January the Nikkei 225 is at 13,900 Exercise (profit of ¥ 100,000 ($1,000)) © Oltheten & Waspi 2012

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Chapter 25: Options Strategies Nikkei 225 Put © Oltheten & Waspi 2012

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collapse of Barings Bank

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Chapter 25: Options Strategies © Oltheten & Waspi 2012 Collapse of Barings Bank Arrested in Frankfurt in March 1995 Extradited to Singapore December 1995 Sentenced to 6 ½ years Released July 1999 Currently lives in Ireland and trades only his own money

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Options III

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