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Published byAaliyah Betterley Modified over 2 years ago

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Speakers: Beesham Lal Umar Farooq

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Introduction Strategy is formed by appropriate mixture of put and call options depending on preferences of trader Strategy is commonly used to make profit from movements in prices Strategy can also be used by an individual for hedging and insurance

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Market circumstances Bullish Bearish Neutral-bullish in volatility Neutral-bearish in volatility

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Long call Long 1 at-the-money call option Almost certain that price would move upward

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Bull call spread Long 1 in-the-money call & short 1 out-of-money call Prices are expected to go up moderately Reduces cost by forgoing unlimited profit

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Call back spread Short 1 in-the-money call & long 2 out-of-money call Expects big move in prices of high volatile security Cost can be zero with proper choice of calls

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Long put Long 1 at-the-money put option Almost certain that price would move downward

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Bear put spread Short 1 in-the-money put & long 1 out-of-money put Prices are expected to go down moderately Reduces cost by forgoing some profit potential

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Put back spread Short 1 in-the-money put & long 2 out-of-money put Expects big downward move in prices of high volatile assets Cost can be zero with proper choice of puts

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Short strangle Short 1 out-of-money put & short 1 out-of-money call Expects prices to remain stable with bearish in volatility Unlimited loss if got betrayed by expectations

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Short butterfly spread Short 1 out-of-money put, long 1 at-the-money put, long 1 at-the-money call and short 1 out-of-money call Expects prices to remain stable with bullish in volatility Unlimited loss if got betrayed by expectations

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Pay later strategy Holds underlying asset, long 2 put options with same strike price & short 1 put option Net premium is zero Needs insurance if price goes down but wants full profit if prices move up Pays for insurance only if it is needed Price of underlying asset at time of maturity Payoff of un- hedged asset with current price of 80 Payoff on 2 purchased l00 strike put options Payoff of written 112.93 strike put option Combined payoff 60-2080-52.937.07 70-1060-42.937.07 80040-32.937.07 901020-22.937.07 100200-12.937.07 110300-2.9327.07 112.9332.9300 1204000

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Conclusion An individual can combine different options depending on his needs Trader can lose a lot of money if her expectations are not up to date

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QUESTIONS

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