1. Trading Strategies Involving Options
Chapter 11

2. 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)

3. 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

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

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

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

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

8. 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

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

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

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

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

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

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

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

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