Option Strategies Flashcards
Synthetic long Forward/Future
+) Long call + Short Put
Synthetic Put and Call
Put and call with opposite position
Covered Call
Who own share and sell a call
Protective put
Who own asset and long put option
Synthetic short forward/futures
Short call + Long put
Synthetic long put
Short forward/futures + Long call
Synthetic long call
Long forward/futures + Long put
Covered call
Long underlying + Short call
+) VT = ST − Max(0, ST − X)
+) Π = ST − Max(0, ST − X) − S0 + c0
+) Maximum gain = X − S0 + c0
+) Maximum loss = −S0 + c0
+) Breakeven price St∗ = S0 − c0
Investment Objectives òf covered call
+ Yield enhancement
+ Reducing a position at a favorable price
+ Target price realization
Investment Objectives of protective put
Loss protection/upside preservation
Protective put = Long underlying + Long put
VT = ST + Max(0,X − ST)
Π = ST + Max(0, X − ST) − S0 − p0
Maximum gain = ∞
Maximum loss = X − S0 − p0
Breakeven price ST∗ = S0 + p0
Bull spread
= Long call (put) with XL + Short call (put) with XH
+) VT = Max(0, ST − XL) − Max(0, ST − XH)
+) Π = Max(0, ST − XL) − Max(0, ST − XH) − cL + cH
+) Maximum gain = XH − XL − cL + cH
+) Maximum loss = −cL + cH
+) Breakeven price ST∗ = XL + cL − cH
Bear spread
= Short put (call) with XL + Long put (call) with XH
+) VT = −Max(0,XL − ST) + Max(0,XH − ST)
+) Π = −Max(0,XL − ST) + Max(0,XH − ST) + pL − pH
+) Maximum gain = XH − XL + pL − pH
+) Maximum loss = pL − pH
+) Breakeven price ST∗ = XH + pL − pH
Straddle
= Long ATM put with X + Long ATM call with X
+) VT = Max(0,X − ST) + Max(0, ST − X)
+) Π = Max(0,X − ST) + Max(0, ST − X) − c0 − p0
+) Maximum gain = ∞
+) Maximum loss = −c0 − p0
+) Breakeven price ST∗ = X − c0 − p0
+) ST∗ = X + c0 + p0
Collar
= Long underlying + Long put with XL + Short call with XH
+) VT = ST + Max(0,XL − ST) − Max(0, ST − XH)
+) Π = ST + Max(0,XL − ST) − Max(0, ST − XH) −S0 −p0+c0
+) Maximum gain = XH − S0 − p0 + c0
+) Maximum loss = XL − S0 − p0 + c0
+) Breakeven price ST∗ = S0 + p0 − c0
Calendar spread
+ Long calendar spread = Buy long-dated option + Write shorter-dated option
+ Short calendar spread = Write long-dated option + Buy shorter-dated option
The role of Interest rate swaps
+ Interest rate swaps can be used to convert a fixed (floating) risk or obligation into a floating (fixed) one.
+ Interest rate swaps can also be used to adjust the overall portfolio duration to a target duration.
The role of Interest rate forwards and futures
+ Interest rate forwards (i.e., FRAs) and interest rate futures (i.e., Eurodollar futures) are often used to manage short-term interest rate risk.
+ Long (short) FRA positions will increase in value when future interest rates rise (fall), while long (short) Eurodollar futures positions will increase in value when future interest rates fall (rise).
role of Fixed-income futures
+ often used to manage long-term interest rate risk.
+ The CTD bond is the one that presents the greatest profit or smallest loss for the seller at delivery within the underlying basket of bonds.
Cash equitization
+ a strategy designed to boost returns by finding ways to equitize unintended cash holdings.
+ It is typically done using:
* stock index futures
* interest rate futures.
VIX futures and options
+ options allow investors to implement their views depending on their expectations about the timing and magnitude of a change in implied volatility.
+ When the VIX futures curve is in contango (backwardation) and assuming volatility expectations
remain unchanged, the VIX futures price will decrease (increase) in price as they approach expiration.
Variance swaps
The buyer of the contract will pay the difference between the fixed variance strike specified in the contract and the realized variance (annualized) on the underlying over the period specified and applied to a variance notional.
naked call
when investors sell (write) a call option but do not have stocks
out of the money
call option: strike price > market price
Put option: strike price < market price
in the money
Call option: strike price > market price
Put option: strike price < market price
quoted future price
+ QFo
+ Future settlement price
actual future price
+) principal invoice amount
+) = QFo(T) x CF
Cash-secured put/ Fiduciary put
If someone writes a put option and simultaneously deposits an amount of money equal to the exercise price into a designated account,
naked put
When someone writes a put but does not escrow the exercise price
naked call
the call writer does not have the underlying asset to deliver if the call is exercised
An investor believes that a stock they own will continue to oscillate in price and may trend downward in price. The best course of action for them to take would be to:
A. sell call options on the stock.
B. buy put options on the stock.
C. enter into both a covered call and protective put strategy
C. enter into both a covered call and protective put strategy
oscillate
= fluctuate
long calendar spread
mean long the options with more time to expiry
