OPTIONS STRATEGIES

Question 1

Describe the difference between a credit spread and a debit spread

Answer 1

Credit spread is an option strategy that involve either puts or calls and gives the investor an initial inflow.

Debit spread, same thing that a credit spread but require the investor to do an initial outflow.

Question 2

Describe the different strategies that an investor can do with a covered call.

Answer 2

Yield enhancing : For yield enhancement, the calls are OTM (possibly substantially so).

Reducing a position : For reducing a position at a favorable price, the calls are ITM.

Price Target : For target price realization, the calls are marginally OTM.

Question 3

Regarding Delta of Puts and Calls options, when are they higher and when are they lower.

Answer 3

Higher when option is ITM

Lower when option is OTM

Question 4

For Gamma of an option, when is it higher

Answer 4

Gamma of an option tend to be higher when the option is ATM and even higher when the option is close to maturity.

Question 5

Identify the concept of a long calendar spread.

Answer 5

Buy the long dated options and sell the short dated options.

Question 6

Which calendar spread strategies will benefit from a stable market or an increase in implied volatility

Answer 6

Long calendar spread

Question 7

If we compute the annualized volatility of an option expiring in two months, how can we have the implied volatility for two months

Answer 7

Square Root of (number of trading days in two month / number of trading days in a year) * annualized implied volatility

Question 8

what is a risk reversal strategies related to implied volatilities

Answer 8

a long risk reversal is buying a call and selling a put