Post on 08-Apr-2018
transcript
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 1/17
Trading & Hedging Strategies Using
Options
Group IV
Group Members
1.Manoj Jain (21)
2.Partha Mandal(27)
3.Prasant Verma(30)
4.Shy amal Das(40)
5.Soumy
aK
anti
Chow d
hury(41
)
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 2/17
2
Types of Trading Strategies
� Strategies Involving A Single Option and Stock .
� Spread Trading Strategy of taking a position intwo or more Options.
� Combination: Take a position in a mixture of
calls & puts (A combination)
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 3/17
Strategies Involving A Single
Option and Stock .
Profit
S T K
Profit
S T
K
Profit
S T
K
Profit
S T K
(a)Long
Position in
stock and
short
position ina call
(b) Short
Position
in a stock
with a
long
position ina call
(c) A Long
Position in
a Put with
a long
Position in
a stock
(d) A
short
Position
in a Putwith a
short
position
in a
stock
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 4/17
Bull Spread Using Calls
Spread Trading Strategy of taking a
position in two or more Options.
K 1
K 2
Profit
S T
Bull callSpread
involvesbuying a callwith a lowerstrike ( High
Premium)and selling a
call with ahigher strike
( low Premium)
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 5/17
Bull Spread Using Puts
Spread Trading Strategy of taking a
position in two or more Options.
K 1
K 2
Profit
S T
Bull Put
Spread
are
created
with in-
the-money
or out-of-
the money
put
options ,
all with
the same
expiry
date.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 6/17
Bear Spread Using Puts
Spread Trading Strategy of taking a
position in two or more Options.
K 1
K 2
Profit
S T
Bear Put
Spread is
created when
higher strike
price ispurchased and
a lower strike
price is sold.
The options
should have the
same expiry
date.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 7/17
Bear Spread Using Calls
Spread Trading Strategy of taking a position
in two or more Options.
K 1
K 2
Profit
S T
Bear call
Spread is
created when
call option is
sold at a lower strike price
while also
buying the
same number
of calls, but at a
higher strike
price. Theoptions should
have the same
expiry date.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 8/17
Butterfly Spread Using
Calls
K 1
K 3
Profit
S T
K 2
Spread Trading Strategy of taking a position
in two or more Options.
Butterfly
Spread Using
Calls is
created by
buying a call
option with a
low strikeprice K1,
buying a call
option with a
high strike
price, K3 and
selling two
call optionswith a strike
price K2
halfway
between K1
and K3
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 9/17
Butterfly Spread Using Puts
K 1
K 3
Profit
S T
K 2
Spread Trading Strategy of taking a position
in two or more Options.
Butterfly
Spread Using
Puts is created
by buying a putwith a low
strike price,
buys a put with
a high strike
price, and sells
the two puts
with anintermediate
strike price.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 10/17
A Straddle Combination
Profit
S T
K
Combination: Take a position in a mixture of
calls & puts (A combination)
A Straddle
Combination
involves buyinga call and put
with the same
strike price and
expiration date.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 11/17
A Strangle Combination
K 1
K 2
Profit
S T
Combination: Take a position in a mixture of
calls & puts (A combination)
A StrangleCombination
is created by
buying one
call at a
higher strike
and one put at
a lower strikewith the same
expiry date.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 12/17
Hedging Using Options
� Consider an inv estor who in Nov 2010 ow ns 1,500 Reliance shares
± The current share price is R s.1010 per share
� The
inv e
stor
is co
ncer
ne
dth
at the
sh
are pr
ice todecline sharply in the next two months and
w ants protection.
� The inv estor could buy 10 January put option
contracts w ith a strik e price of R s.1010 on NSE.± This would giv e the inv estor the right to sell 1,500
shares for R s.1010 per share.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 13/17
Hedging Using Options ± contd.
� If the quoted option price is R s.25, each option contract would cost 150 x R s. 25 = R s. 3750, and the total cost of the hedging strategy would be 10
x R S. 3750 = R s. 37,500
� The strategy costs R s. 37,500 but guarantees
that the shares can be sold for at least Rs.1010 per share during the life of theoption.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 14/17
Hedging Using Options ± contd.
� If the mark et price of Reliance f alls below R s. 1010, the options can be exercised so that R s. 15,15,000 is realized for the entire holding.
± W hen the cost of the options is tak en into account, theamount realized is R s.14,77,500
� If the mark et price stay s above Rs. 1010, theoptions are not exercised and expire worthless.
� Howev er, in this case the value of the holding is alw ay s abov e 15,15,000 (or abov e 14,77,500 if the cost of the options is tak en into account).
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 15/17
Speculation Using Options
� Suppose that it is October and a speculator considersthat Cisco is likely to increase in value ov er thenext two months.
± The stock price is currently $20, and a two-month call option
w ith a $25 strik e price is currently selling for $1.� The speculator is w illing to invest $4,000.
� It has two alternatives± The f irst alternativ e inv olv es the purchase of 200 shares
± The second inv olv es the purchase of 4,000 call options (i.e., 20
call option contracts)
� Suppose that the speculator's hunch is correct and theprice of Cisco's shares rises to $35 by December.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 16/17
Speculation Using Options ± contd.
� The f irst alternativ e of buy ing the stock y ields a prof it of 200 x ($35 - $20) = $3,000
� Howev er, the second alternative is far moreprofitable.
� A call option on Cisco w ith a strik e price of $25 giv es a payoff of $10, because it enables something worth $35 tobe bought for $25.
± The total payoff from the 4,000 options that are purchased under the second alternativ e is:
4,000 x $10 = $40,000± Subtracting the original cost of the options y ields a net prof it of
$40,000 - $4,000 = $36,000
� The options strategy is, therefore, 12 times as prof itableas the strategy of buy ing the stock.
8/7/2019 Trading & Hedging Startegies involving Options
http://slidepdf.com/reader/full/trading-hedging-startegies-involving-options 17/17
Speculation Using Option ± contd.
� Options also giv e rise to a greater potential loss.
� Suppose the stock price falls to $15 by December± The f irst alternativ e of buy ing stock y ields a
loss of 200 x ($20-$15) = $1,000.
± Because the call options expire w ithout beingexercised, the options strategy would lead to a loss of $4,000²the original amount paid forthe options.