# 10.1 Trading Strategies Involving Options Chapter 10.

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10.1 Trading Strategies Involving Options Chapter 10

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)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.20 Bull Spread Using Calls Figure 10.2 X1X1 X2X2 Profit STST

10.21 Bull Spread Using Puts Figure 10.3 X1X1 X2X2 Profit STST

10.22 Bear Spread Using Calls Figure 10.4 X1X1 X2X2 Profit STST

10.23 Bear Spread Using Puts Figure 10.5 X1X1 X2X2 Profit STST

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

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

10.26 A Straddle Combination Figure 10.10 Profit STST X

10.27 Strip & Strap Figure 10.11 Profit XSTST XSTST StripStrap

10.28 A Strangle Combination Figure 10.12 X1X1 X2X2 Profit STST