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
indirect hedging
moves the currency risk from one foreign currency to another foreign currency
Basis risk
The portfolio manager must be aware that any time a direct currency hedge (i.e., a spot rate hedged against its own forward contract) is replaced with an indirect hedge (cross hedge, macro hedge), basis risk is brought into the portfolio. This risk reflects the fact that the price move in the exposure being hedged and the price movements in the cross hedge instrument are not perfectly correlated, and that the correlation will change with time—and sometimes both dramatically and unexpectedly.
minimum-variance hedge ratio application
Calculating the minimum-variance hedge ratio typically applies only for “indirect” hedges based on cross hedging or macro hedges; it is not typically applied to a “direct” hedge in which exposure to a spot rate is hedged with a forward contract in that same currency pair. This is because the correlation between movements in the spot rates and its forward contract is likely to be very close to +1.
foreign currency return
the return of a foreign asset measured by foreign currency.
domestic currency return
on a foreign asset will reflect both the foreign-currency return on that asset as well as percentage movements in the spot exchange rate between the home and foreign currencies.
CAD/USD spot rate =1.26 CAD/USD future rate = 1.25
CAD investor buys USD asset- make sure using CAD/USD rate, or USD is the base currency as the denominator (分母) not USD/CAD
currency and fixed income correlation
Higher correlation to the fixed income; add little diversity benefit to fixed income portfolio
Currency Hedging cost
transaction cost + opportunity cost (forgo any possibility of favorable currency movement)
