Chapter 8: Trading, Hedging and Investment Strategies Flashcards
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What is an Intra Market Spread?
The spread between two contracts, with the same underlying asset, but different maturities.
How Would the Spread Between Two Contracts Narrow if Prices are Rising?
i.e for a 3 month and a 6 month future.
The price of the 3 month future is going to increase faster than the price of the 6 month future.
How Would the Spread Between Two Contracts Narrow if Prices are Falling?
i.e for a 3 month and a 6 month future.
The price of the 6 month contract falls faster than the price of the 3 month contract.
What Would an Investor do When Spreads are Narrowing?
i.e for a 3 month and a 6 month future.
Buy the 3 month and sell the 6 month, then once the prices have risen, sell your 3 month and buy the 6 month.
What Would an Investor do if the Intra Market Spread is Widening in a Contango Market?
What action and what trade?
Trade: Sell the spread
Action: Sell the near dated and buy the far dated.
What is an Inter-Market Spread?
Definition and example pair
Buying and selling futures on different but connected assets.
E.g. Long Gilt Future vs Short Sterling Future.
What is the Crack Spread?
Which commodities are involved?
The relationship between; Crude Oil, Heating Oil and Gasoline.
What is a Covered Short Call?
Why is it used?
If an investor is long on a unvolatile asset, they can sell a call, so they have profited off the premium and have boosted the asset.
This can also help soften losses if price falls.
What does a Covered Short Call Essentially Create?
A short put position.
What is a Sythetic Long Future = To ?
NOTE: This can be rearranged.
Which Forumla of Options
Long Future = Long Call and Short Put
What is a Bull Call Spread?
Which trades does this involve?
By Buying a Call and Selling a Call
For a Bull Call Spread, What is the Maximum Loss an Investor Can Incur?
The difference between the two premiums.
What is the Maximum Profit for a Bull Call Spread?
In absolute terms.
The difference between the two strike prices - the initial debt (premium paid)
If Strikes are 100 and 110, Which One Would you Buy for a Bull Call Spread?
100, because with BuLl you buy LOW.
For a Bear Call Spread, How is the Maximum Profit Calculated?
The difference between the two premiums.
What is the Maximum Loss a Bear Call Spread Can Incur?
The difference in premiums minus the difference in strikes.
What is the Rule for a Bull Put Spread?
Buy the ……., Short the ……..?
Buy the near and short the far.
What is the Maxium Profit for a Bull Put Spread?
It is the Net Initial Credit.
How does one Calculate the Break Even Point of a Bull Put Spread?
Higher strike price - net initial credit.
What is a Horizontal / Calendar Spread?
An option with the same strike but different maturities.
What is a Vertical Spread (Bull/Bear)?
Options with the same but different what?
The spread between options with the same maturities and the same strike price.
What is a Diagonal Spread?
Different options, with both different maturities and different strikes.
What is a Long Straddle?
What does one buy, with the same……..
Where one goes both long a call and long a put with the same strike.
What is the Cost of a Long Straddle?
The total of both premiums.
What is the Shape of a Long Straddle Curve?
V for……
V for volatility.
What is the Max Profit for a Long Straddle?
For both upside and downside.
Infinite on the upside.
But limited to the market price - the premiums paid.
Why Would an Investor Chose a Short Straddle?
They dont expect any volatility, therefore they just collect both premium from selling calls and puts.
What is a Short Straddle?
Where an investor sells a call and sells a put.
What Shape is a Short Straddle Curve?
N for?……
N for NO VOLATILITY.
What Curve is a STRANGLE Curve?
Bart Simpson?
A _/ Shape, the same shape Homers hands make when he strangles bart
What is a OTM Long Strangle?
What trades does this consist of?
It is a long call and long put with different strike prices.
What is a OTM Short Strangle?
It is a short call and short put, with different strike prices.
What is the Max Loss for a Long Strangle?
It is the Premiums paid.
What is the Max Profit for a Short Strangle?
It is the premiums paid.
What is the Max Risk and Max Reward for a Bull Call?
Risk - Net Premium paid
Reward - Difference in strikes minus net premium paid
What is the Max Risk and Max Reward for a Bear Call?
Risk - Difference in strike price less the net premium recieved.
Reward - Net premium received.
What is the Max Risk and Max Reward for a Bull Put?
Risk - Difference in strikes less the net premium recieved.
Reward - Net premium recieved.
What is the Max Risk and Max Reward for Short Straddle?
Risk - Unlimited
Reward - Sum of the premiums received.
What is the Max Risk and Max Reward for a Long Straddle?
Risk - Sum of premiums
Reward - Unlimited
What is the Max Risk and Max Reward for a Bear Put?
Risk - Net premium paid
Reward - Difference in strikes less the net premium paid.
What is the Max Risk and Max Reward for a Long Strangle?
Risk - Premiums paid
Reward - Unlimited
What is the Max Risk and Max Reward for a Short Strangle?
Risk - Unlimited
Reward - Total premium recieved
