Lecture 3

Question 1

Floors

Answer 1

used to insure a long position (price going down)

put is combined with a position in the asset

Generates a position that looks like a call

Question 2

Caps

Answer 2

used to insure a short position (price increasing)

call is combined with a position in the asset

generates a position that looks likes a put

Question 3

Covered writing (selling insurance)

Answer 3

writing an option when there is a corresponding long position in the underlying asset

Question 4

Naked writing

Answer 4

writing an option when the writer does not ahve a position in the asset

Question 5

Covered calls

Answer 5

writing a covered call generates the same profit as selling a put

Question 6

Covered puts

Answer 6

writing a covered put generates the same profit as writing a call

Question 7

Synthetic forwards

Answer 7

buying a call and selling a put on the same underlying asset wiht each option having the same strike price and time to expiration

The forward contract has 0 premium while the synthetic forward requires that we pay net option premium

Question 8

Put-Call Parity

Answer 8

Call - Put = PV(F - K) or S + P = C + B

Net cost of buying the index using options must equal the net cost of buying the index using a forward contract

Question 9

Spread

Answer 9

position consisting of only calls or only puts in which some are written and some are purchased

Question 10

Collar

Answer 10

Purchase of a put and sale of a call with a higher strike price

Question 11

Bull spread

Answer 11

buy a call and sell an identical call wihta higher strike price

or same with puts

LC and SC or LP and SP

Question 12

Bear spread

Answer 12

Sell a call and buy an identical call with a higher strike price

same with puts

SC and LC or SP and LP

Question 13

Box spread

Answer 13

using options to create a synthetic long forward at one price and a synthetic short forward at a different price - it means borrowing or lending money. no stock price risk

Alternate to buying a bond

can be used to offset capital gains tax as it is a synthetic bond that generates capital gains or losses

K1 - LC + SP
K2 - LP + SC
or
K1 - LP + SC
K2 - LC + SP

Question 14

Ratio Spread

Answer 14

constructed by buying m calls at one strike and selling n calls at a different strike

Same with puts

Question 15

Collars

Answer 15

LP and SC
If premium on call > put then above 0
If premium of put > call then below 0
represents a bet that the price of the underlying asset will decrease and resembles a short forward

Investopedia - believe the stock will rise further and dont want to sell but still cautious about downside risk

Question 16

Zero-cost collar

Answer 16

when premiums of the call and put exactly offset each other

Question 17

Straddles

Answer 17

buying a call and put with teh same price and time to expiration

Bet on volatility - can have straddles for high vol and low vol

Written straddles - low vol

Question 18

Strangles

Answer 18

Reduce the cost of a bet on vol by decreasing the put strike to be OTM and increasing the call strike to be OTM

Bet on volatility - can have strangles for high and low vol

Written strangles - low vol

Question 19

Butterfly spreads

Answer 19

Write a straddle + add a strangle = insured written straddle - insures against large losses on a straddle