Risk Management - Options Strategies Flashcards
What is the bull spread strategy?
Long & Short call. Short call has a higher exercise price.
Long & Short put. Short put has a higher exercise price.
What is a bear spread strategy?
Opposite of a bull spread.
Long & Short call. Long call has a higher exercise price.
Long & Short put. Long put has a higher exercise price.
What is a butterfly spread strategy?
Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.
What is a collar strategy?
A covered call and protective put.
What is a long straddle strategy?
A long call and long put with the same exercise price.
What is a box spread strategy?
A call bull spread strategy and a put bear spread strategy. The return should be the risk-free rate.
When is the risk of a delta hedge greatest and how can it be reduced?
When option values are subject to large changes (i.e., when gamma is large), the position faces the most risk. The risk of a delta hedge is greatest when gamma is large, so delta hedgers will gamma hedge. The hedge entails combine the underlying stock position with two options positions in such a manner that both delta and gamma are equal to zero.
What is the relationship of delta to the price of the underlying relative to a long call (short put) option’s strike price (i.e., moneyness of the option)?
If a call option is in-the-money, its delta will generally be above 0.5, and as it approaches expiration, its delta approaches 1.0. Likewise, if the option is out-of-the-money, its delta will usually be below 0.5, and as it approaches expiration, its delta falls to zero. As an at- or near-the-money option approaches expiration, its delta will tend to move quickly to either one or zero, depending on the direction of the stock price movement.
What is an interest rate cap?
An interest rate cap is a series of interest rate calls with the same strike rate but different expiration dates.
What is a covered call?
Buy the underlying and sell a call option.
What is a protective put?
Holding a long position in an underlying and buying a put option.
What is the effect of a long interest rate call?
A long interest rate call can limit the effective interest paid on a floating-rate loan for a given period. It pays the call holder when rates rise above the strike rate, and offsets the increased cost of the floating-rate loan.
What is the effect of a long interest rate put?
A long interest rate put can place a lower limit on the effective interest to be received by a lender of a floating-rate loan for a given period. It pays the put holder when rates decrease below the strike rate.
What is delta hedging?
Delta hedging generally refers to immunizing the value of an option position from changes in the value of the underlying asset.
What is the relationship of delta to the price of the underlying relative to a long put(short call) option’s strike price (i.e., moneyness of the option)?
If a call option is in-the-money, its delta will generally be below -0.5, and as it approaches expiration, its delta approaches -1.0. Likewise, if the option is out-of-the-money, its delta will usually be above -0.5, and as it approaches expiration, its delta rises to zero. As an at- or near-the-money option approaches expiration, its delta will tend to move quickly to either negative one or zero, depending on the direction of the stock price movement.
