Options Strategies Flashcards
Put call parity
S + P = C + X/(1+r)^T
Put call froward parity
F0(T)/(1+r)^T + p = C + X/(1+r)^T
Synthetic Long forward position
Long call, short put
Synthetic short forward position
Sell a call, buy a put
Synthetic Long put
short stock and long a call
Synthetic long call
long a stock and short a put
Theta for long stocks, long calls and long put
Theta (Θ) is the daily change in an option’s price, all else equal. Theta measures the sensitivity of the option’s price to the passage of time, known as time decay. Theta for long calls and long puts is generally negative.
Volatility Skew
the implied volatility increases for OTM puts and decreases for OTM calls, as the strike price moves away from the current price. This shape persists across asset classes and over time because investors have generally less interest in OTM calls whereas OTM put options have found universal demand as portfolio insurance against a market sell-off.
Volatility Smile
When the implied volatilities priced into both OTM puts and calls trade at a premium to implied volatilities of ATM options, the curve is U-shaped and is called a volatility smile
Risk Reversal
A combination of long (short) calls and short (long) puts on the same underlying with the same expiration is a long (short) risk reversal.
In particular, when a trader thinks that the put implied volatility is too high relative to the call implied volatility, she creates a long risk reversal, by selling the OTM put and buying the same expiration OTM call. The options position is then delta-hedged by selling the underlying asset.
The trader is not aiming to profit from the movement in the overall level in implied volatility. In fact, depending on the strikes of the put and the call, the trade could be vega-neutral. For the trade to be profitable, the trader expects that the call will rise more (or decrease less) in implied volatility terms relative to the put.
Seagull Spread
Put spread + covered call
writes
a call option while a put spread writes a deep-OTM put option. Of course, the manager
can always do both: that is, be long a protective put and then write both a call and a deep-OTM put. This option structure is sometimes referred to as a seagull spread.
NDF (Non-deliverable FDirorwards)
when an EM currency trades with capital controls, making delivery of the currency difficult
NDF similar to regular forwards, but are cash settled
The non-controlled currency is usually the USD
pricing of the NDF will not follow CIRP condition due to capital controls
Pricing will reflect supply and demand
Direct hedging
moves the currency risk from one foreign currency to another foreign currency
Cross hedging
moves the currency risk from one foreign currency to another foreign currency
minimum variance hedging
A mathematical approach to determining the optimal cross hedging ratio
