R16 - Options strategies Flashcards
Describe Call in option context
The right to buy that have the long position, the short undertaken to deliver the underlying if the buyer chooses to exercise. Call has the button do exercise.
Put in option context
The right to sell that take the short position, the short has undertaken to take delivery of the underlying if the buyer chooses to exercise
Explain Underlying
Include stock, indices, bonds and futures, currencies, commodities, and more abstract factors such stock vol
Describe difference between European and American style options
European (boring) - only at expiration date
American - any trading day
Who pays the the premium to hold the option? seller or buyer
Buyer pay a premium to the seller.
Explain the notation used in this chapter
X,S,p and c, PV x
X = Exercise price
S = Underlying stock
p and c = put and call premiums
PV x = present value of underlying
Explain the difference of vol used for pricing options
For acessing risk and return performance usually is used the HISTORICAL vol, but for pricing options are used the LOOKING FORWARD.
How can we describe the total premium - option context
sum of the parts:
(1) Intrinsic value - the value of immediate exercise
(2) Time value - the additional value reflective of what might happen between now and the point of expiration
Describe when call/ put are in the money (ITM)
Call - Current price > strike prince
Put - Current price < strike price
ITM in this situations and out of the money opposite (OTM)
Explain the relation of premium and vol, time to expiry and premium paid
Higher vol means higher option premiums
Less time to expiry means lower option premiums
Explain the shape of a call option, how the diagram of returns. Also explain the main racional of profit with call option.
The higher stock price at expiry, the higher the profit on the call, with no upper limit.
Profit from a rise in the underlying price while limiting the downside.
Explain the shape of a put option, how the diagram of returns. Also explain the main racional of profit with call option.
The lower stock price at expiry, the higher the profit on the call, with no upper limit.
Profit on fall of the underlying price, while limiting the downside.
Tips
The short put position has limited exposition because the minor value is 0.
F- put and call parity
Explain covered call
When you think that a stock has a limited upside you can SHORT a call and all the upside will be offset by the increasing negative value of the short call.
F - Maximum profit and breakeven at expiry for covered call
Long Call with short a put what we create and describe the profit curve
Create a synthetic long forward position
Covered calls how to build them
To build them:
- Sell a call
Explain the racional for building the position:
- Limited upside
- Win the premiun when you believe that stock will go side ways
-Or will sell the stock near future
- Any option price below strike price will miss the oportunity cost
How to hedge the risk of short a option
Mantain a ownership of stock, because you can deliver the own stock you have.
Meaning of protective put, describe the underlying price vs. profit chart
Classic option based hedge - is buying a put for protect against underlying falling in value
Describe collar strategie and profit or loss
Envolve to buy a put for protect to downside and short a call OTM for pay for the hedge given that you already have the stock. The profit or loss is limited by two bands.
Describe Stradle Strategie andthe profit/ loss chart and what’s the difference for short straddle
It’s classic volatility play. A long stradle involves purchase equal number of calls and puts with same expiry date and strike. For short stradle the V shape are inverted.
Explain the bull call spread objective and profit/loss chart vs. unerlying price
Use long options on lower strike and short options on higher strike. The objective is to profit over interval.
Remember
Always use in exam put to make a bear put spread, unless question states otherwise.
Explain the bear put spread objective and profit/loss chart vs. underlying price
Use short option on lower strike and long option on higher strike. The objetcitve is to profit over interval.
Remember
Always use in exam put to make a bear put spread, unless question states otherwise.
Describe the risk of use short call and put’s with long call and puts using american style options, when using on bull call spread and bear put strategy
In this scenario short call/put can be ITM while long position aren’t so can be exercise early
Explain the relation of delta for call and puts closer atm/ itm
How to explain the portifolio intermos of add Deltas (Stocks, call, options)
Stocks = +1 delta x shares
Put = 10 x 100 x - delta
Call = 10 x 100 x + delta
The sum is the exposition of deltas to portifolio
Explain the difference of calendar spreads option strategies
Exploit difference in theta betwen higher absolute theta and longer dated options. Longer dated and selling shorter period with same strike price.
Example
Belive that a stock can go flalt near term and appreciate ina near future. Can sell a call in ST and buy a call in LT.
What’s is the impact of vega in a stradle
High vol high value
What’s the difference between vol smile and skew?
Explain delta hedge and implications
Usualy when you size a position with 0 delta one positive side and other negative one. The main concern that this relationship can change as price moves and time passes, so this estruture need constant rebalance.
Resume in option context=> Not confident always
Dont Need to remember perfectly
Remember when an exercise ask for POSITION?
Not consider the premium on this analisys.
Usually why OTM puts has higher implied vol than ATM/OTM call ?
Because os past tail events like crises in 2008
