Transcript Trading Strategies Involving Options

Trading Strategies
Involving Options
Chapter 10
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Strategies to be Considered
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Stock plus option
Two or more options of different types
(a combination)
Two or more options of the same type
(a spread)
Bond plus option to create principal
protected note
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Positions in an Option & the
Underlying (Figure 11.1, page 257)
Profit
Profit
K
K
ST
ST
(a)
(b)
Profit
Profit
K
ST
(c)
K
ST
(d)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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A Straddle Combination
Figure 11.10, page 266
Profit
K
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Strip & Strap
Figure 11.11, page 267
Profit
Profit
K
Strip
ST
K
ST
Strap
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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A Strangle Combination
Figure 11.12, page 268
Profit
K1
K2
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Bull Spread Using Calls
(Figure 11.2, page 258)
Profit
ST
K1
K2
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Bull Spread Using Puts
Figure 11.3, page 259
Profit
K1
K2
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Bear Spread Using Puts
Figure 11.4, page 260
Profit
K1
K2
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Bear Spread Using Calls
Figure 11.5, page 261
Profit
K1
K2
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Butterfly Spread Using Calls
Figure 11.6, page 263
Profit
K1
K2
K3
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Butterfly Spread Using Puts
Figure 11.7, page 264
Profit
K1
K2
K3
ST
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Principal Protected Note


Allows investor to take a risky position
without risking any principal
Example: $1000 instrument consisting of
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3-year zero-coupon bond with principal of
$1000
3-year at-the-money call option on a stock
portfolio currently worth $1000
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Principal Protected Notes continued
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Viability depends on
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Level of dividends
Level of interest rates
Volatility of the portfolio
Variations on standard product
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Out of the money strike price
Caps on investor return
Knock outs, averaging features, etc
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Calendar Spread Using Calls
Figure 11.8, page 265
Profit
ST
K
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Calendar Spread Using Puts
Figure 11.9, page 265
Profit
ST
K
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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Box Spread
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A combination of a bull call spread and a
bear put spread
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 (see Business Snapshot 11.1)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 11, Copyright © John C. Hull 2013
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