Transcript Trading Strategies and Simulation

Trading Strategies &
Simulation
Working Basic Profiles
► Buy
Call
► Sell Call
► Buy Put
► Sell Put
First Applications
► Protective
► Covered
Put
Call
Protective Put
► Combine
Long Stock with Purchase of Put
► Choose Expiry to match horizon of desired
protection of downside.
► Choose Strike around (usually just above) current
Stock Price
► Protects Stock Price from loss beyond put
premium
► Very Similar to Car Insurance
(although everyone’s strike is below the current
car value due to deductibles)
Covered Calls
► Combine
Long Stock with Sale of Call
► Choose Strike around (usually just above)
current Stock Price
► Protects Stock Price from loss less than
call premium
► Guarantees Sale Price (X + Prem Recv’d)
Writing Calls to
Generate Income
► Can
be very conservative or very risky,
depending on the remainder of the
portfolio
► An attractive way to generate income
with foundations, pension funds, and
other portfolios that will always hold
the stock used in the cover
► A very popular activity with individual
investors
Writing Calls to Generate
Income (cont’d)
► Writing
when
calls may not be appropriate
 Option premiums are very low
 The option is very long-term
Simulation
Simulation
► Brokerage
Account and Delayed Data
from Exchanges
► Activate Some Strategies
► Document Intent, Execute and Resolve
► Make Some Money, Have Some Fun!
Exchanges
► Chicago
Board of Trade
 www.cbot.com
► Chicago
Merchantile Exchange
 www.cme.com
► New
York Board of Trade
 www.nybot.com
► New
York Merchantile Exchange
 www.nymex.com
CBOT
► Agricultural
 Corn (C), Soybeans (S), Soybean Oil (BO),
Soybean Meal (BM), Wheat (W), Oats (O)
► Interest
Rates
 10y Notes (TY), 30y Bond (US)
► Indexes
 Dow Jones 30 (DJ)
CME
►
Meats
 Live Cattle (LC), Feeder Cattle (FC), Lean Hogs (LH), Pork
Bellies (PB)
►
►
Lumber (LB)
Indexes
 Equity: S&P 500 (SP), NASDAQ 100 (ND)
►
Foreign Exchange
 British Pound (BP), Canadian $ (CD), Japanese Yen (JY),
Swiss Franc (SF), Euro (UR)
►
Interest Rates
 Euro$ (ED), T-Bill (TB)
NYBOT
► Food
& Fiber
 Cocoa (CC), Coffee (KC), Sugar-World (SB),
FCOJ (OJ)
 Cotton (CT)
► Indexes
(NYFE)
 US$-Index (DX)
NYMEX
► Energy
 Light, Sweet Crude Oil (CL), Heating Oil (HO),
Unleaded Gasoline (HU), Natural Gas (NG)
► Metals
 Gold (GC), Silver (SI), Copper (HG)
Positions
►
►
►
$500,000 portfolio
No more than $150,000 in any one position
At least 4 option and 2 futures trades
 4 options as we discuss options
 2 futures as we discuss futures
►
Each position must have:





Documented opinion
Documented Security information
Initial Trade Price
Daily Closing Prices
Final Closing Price
Documented Security Information
► Contract/Position
Size
► Contract/Position Value
► Last Trading Day of Contract
► Contract/Position Initial Margin Deposit
Multi-Option Trading
Strategies
Take a position in:
► A mixture of calls & puts
 This is known as a combination
► 2 or more options of the same type
 This is known as a spread
Trading Strategies
A Long Straddle Combination
• Figure 4-1: Buy 1 Call & 1 Put @
Profit
Same X
X
Prices are expected to move,
but don’t know which way.
ST
A Short Straddle Combination
• Figure 4-2: Sell 1 Call & 1 Put @
Profit
Same X
X
ST
Prices are not expected to move,
either way (RISKY!!!). Get to keep premiums,
but possible unlimited losses.
A Long Strangle Combination
• Figure 4-3: Buy 1 Call @ Hi X
Profit
& Buy 1 Put @ Low X
X1
X2
ST
Prices are expected to move BIG,
but don’t know which way, and willing
to give up some profit to pay less for position.
A Short Strangle Combination
• Figure 4-3: Sell 1 Call @ Hi X
Profit
& Sell 1 Put @ Low X
X1
X2
ST
Prices are not expected to move beyond X1 or
X2, but not willing to bet they might move
between. Get to keep premiums, but unlimited
possible losses.
Bull Spread Using Calls
► Figure
Profit
4.7: Buy 1 Low X Call, and
Sell 1 Hi X Call
X1
X2
ST
Prices are expected to rise, but only modestly
(not above X2). Willing to give up “above X2”
to pay less for position (compare to naked call).
Bull Spread Using Puts
• Buy 1 Low X Put and Sell 1 Hi X Put
Profit
X1
X2
ST
Bear Spread Using Puts
• Sell 1 Lo X Put and Buy 1 Hi X Put
Profit
X1
X2
ST
Again, as you are willing to give up move
“below X1”, position costs less than naked put.
Bear Spread Using Calls
• Figure 4-8 : Buy 1 Hi X Call, and
Profit
Sell 1 Lo X Call
X1
X2
ST
Prices are expected to fall, but only modestly
(not below X1). Willing to give up “below X1”
to pay less for position (compare to naked put).