Trading Strategies Involving Options Chapter 11

Three Alternative Strategies Take a position in the option and the underlying asset Take a position in 2 or more options of the same type, i.e. all calls or all puts (spread) Combination: Take a position in a mixture of calls & puts (combination)

Positions in an option & the underlying stock (put-call parity) Profit Profit K K ST ST (b) Long put (a) Short put Profit Profit K ST K ST (c) Long call (d) Short call

Bull Spread Using Calls (buy low K, sell high K) Profit ST K1 K2

Bull Spread Using Puts (buy low K, sell high K) Profit ST

Bear Spread Using Puts (buy high K, sell low K) Profit ST

Bear Spread Using Calls (buy high, sell low K) Profit K1 K2 ST

Box Spread A combination of a bull call spread and a bear put spread Payoff diagram looks like a box If all options are European a box spread is worth the present value of the difference between the strike prices If they are American this is not necessarily so

Butterfly Spread Using Calls (buy lowest and highest K, sell 2 intermediate K) Profit K1 K2 K3 ST

Butterfly Spread Using Puts (buy highest and lowest K, sell 2 intermediate K) Profit K1 K2 K3 ST

Calendar Spread Using Calls (short short, long long; at short maturity date) Result looks like a butterfly spread Profit ST K

Calendar Spread Using Puts (short short, long long; at short maturity date) Result looks like a butterfly spread Profit ST K

A Straddle Combination: long call and put (same K, same expiry) Profit K ST

Strip (2 puts, 1 call) & Strap (2 calls, 1 put) Profit Profit K ST K ST Strip Strap

A Strangle: similar to straddle but call K > put K Profit K1 K2 ST

Strangle not!: what if call K < put K? Profit K1 K2 ST 11.16 16