Derivative and currency mgmt 15-17 Flashcards
put-call parity
so+po = x + xe^(-rt)
synthetic long forward
long call +short put with same strike
synthetic short forward
long put + short call
synthetic call
long call = asset + put
synthetic put
long put = call - asset
covered call
stock + short call
max profit = (x-so)+co
breakeven= So-Co
Max loss = unlimited
protective put
buying insurance
upside potential with limited downside risk
stock + long put
max profit = unlimited
breakeven So+Po
Max loss = S0-x +P0
Implied volatility
value of unobservable volatility variable that equities the result of adoption pricing model
Delta
change in option price/change in underlying
call +
put -
Gamma
change in delta/change in underlying value
largest at the money near S0
call/put +
Vega
change in value of option / change in volatility of underlying
call/put +
Theta
time decay, sensitivity of option’s price o passage of time
call/put -
benefit of covered call
a. yield enhancement
writing covered calls is cash generating in anticipation of limited upside moves in the underlying
b. reducing a position at a favorable price
call premium = time value + intrinsic value
= time value + max(0, s-x)
sell ITM call option
c. target price realization (hybrid of a+b)
write OTM calls with K near the target price for the stock
Collar
acquire downside protection through protective put but reduce cash outlay by writing a covered call
protective put + covered call
Long stock + long put Xl - call XH
buy int rate floor + selling int rate cap
zero - cost collar buy put + sale call with same premium net cost=0 BEI=S0 max gain = St-So max loss = S-x
sacrifice the position part of the return distribution in exchange for the removal of the adverse position
- narrow the distribution of possible investment outcomes, risk is reduced return is limited
- economically intermediate b/w pure equity and FI exposure
cash secure put
for bullish view
acquire shares at a particular price
write a call and simultaneously deposit same amount of money equal to the exercise price in a designated account
bull spread
buy XL, short XH
when price increase spread increase more value
bull call
long call L + short call H (less expensive) debt spread
profit = max(0, St-XL) - max(0, St-Xh) -CL + CH
Max profit = XH-XL +CH-CL
Max loss = CH-CL
BEI = XL-net premium
bull puts
long put L + short put H (more expensive) credit spread
profit = max (0, XL-S) - max(0, XH-S)
BEI between two strike
bear spread
Short XL, buy XH
when price decrease spread increase more value
bear call
short call L + long call h
bear put
short put L + long put H
spread are classified in 2 ways
market sentiment
by direction of the initial cash flow
debt spread
long
long option value > short option value
credit spred
short
the short option value > long option value
Tactical adj. for option trader
adding a short leg to a long position (bull call)
spread and dealt (change in market view)
Long straddle
short
long put + long call with same x and exp. date
short put + short call
two BEI X+/- (C+P)
MAX LOSS = -P-C
calendar spread
sensitive to implied volatility
take advantage of the time decay
time decay is more prominent for a short term option
long (stable market/increase in implied volatility)
long more distant call and sell near call
short (decrease implied volatility)
long near term call and sell the long-daed call
credit spread implied volatility decrease
Themat for ITM call may provide motivation for a short calendar spread.
implied volatility BSM
Std(month%) = std(annual %) / sir(252/21)
if an investor buy an ATM one-month (21)day straddle using puts and call, in order to be profitable, price must move up/down by at least by the implied volatility