Final Flashcards
(28 cards)
What are the different types of volatility option strategies?
-straddle
-straps
-stripes
Butterfly
What is a straddle?
Simultaneously buy a call and a put option with the same strike price and same expiry date.
When is straddle useful?
Expected increase in volatility, breakeven happens when underlying asset value differs from the strike price by an amount bigger than the premium paid
What is a strangle?
Simultaneously buy call and put options with the same strike and maturity but they are out-of-the-money
What are the pros and cons of a strangle?
pro: it serves the same purpose as the straddle but is much cheaper because it’s out-the-money
con: you have to wait some time until the action becomes in-the-money (if it ever does)
What is a strap?
More expensive strat than straddle, provides double the profit on the upside (bullish expectation)
How do you build a strap?
You buy 2 ATM calls + 1 ATM put
What is a strip?
More expensive strat than straddle, provides double the profit on the downside (bearish expectation)
How do you calculate the u in CRR
u: exp(stddev*sqrt(t))
Where stddev is yearly and t=T/N
How do you calculate the d in CRR
1/u
How do you calculate p (probability of up) in CRR
p:(exp(rt)-d)/(u-d)
How do you find the forwards spot prices in CRR
Su = Su
Sd = Sd
How do you find the payoffs of a call & put
Put: max(K-S,0)
Call: max(S-K,0)
How do you discount the flows when pricing an option in CRR
S = (pSu+(1-p)SD)*exp(-rt)
What are the two types of KO’s?
Up and out
Down and out
What are the two types of KIs
Up and in
Down and in
What is a reverse knock in
KI that is in the money when barrier is triggered
Put: H>K
Call: K>H
What is call put parity?
C+PV(K) = P + S
What does the call put parity tell us?
Buying a call and shorting a put is like a synthetic forward where you buy the contract at price K
What is a protective put?
Protection against potential loss of owning a stock
What does a protective put imply?
Buying put option while still holding underlying
What are the different types of option spreads?
Collar
Vertical bear spreads
Call and put ratio spreads
Box spread
What is a collar/hedge wrapper
Reduce negative returns + limit positive returns of underlying
What is a vertical bull spread
Buying and selling two options of the same class but different K: reduce premium paid on strategy
