Section 2 - R8 - Option Strategies Flashcards
Synthetic Forward (Formula)
Long Fwd = Long Call + Short Put
Call Payoff (Formulas)
Long Call = Max [(S-X), 0] - C0
Short Call = Min [(S-X), 0] + C0
Put Payoff (Formulas)
Long Put = Max [(X-S), 0] - P0
Short Put = Min [(S-X), 0] + P0
Δ Delta (Formula)
Δ = Δ Option / Δ Price
(+) Call
(-) Put
Gamma (Formula)
Gamma = Δ Delta / Δ Price
(+) Long Option
(-) Short Option
Vega (Formula)
Vega = Δ Option / Δ Vol
(+) Long Option
(-) Short Option
Theta (Formula)
Theta = Δ Option / Δ Time
(-) for short option
Covered Call (Formula)
Covered Call = Long Asset + Short Call
Payoff:
1) OTM: Gain = Limited to Premium
2) ITM: Loss will occur
Motivation:
- Yield enhancement if OTM
- Reduce LONG ASSET position
- Get P&L @ expiration
Portfolio Covered Call Value (Formula)
Long Covered Call Perspective:
Portfolio Value = (St - Value of Call)
Value of Call = Max [(S-X), 0]
Covered Call P&L (Formula and Rationale)
ITM Gain P&L = [(X-S0) + C0]
OTM Gain P&L = [Δ Asset Value + C0]
Rationale:
Always gain C0 as sold call
Gains ΔSt if OTM due to long asset
Gains (X-S0) because I locked sell @ X
Protective Put & Portfolio Value (Formula)
Protective Put = Long Stock + Buy Put
Long Protective Put Value = St + Value Put
Value Put = Max [(X-St), 0]
Rationale: Limit losses
Protective Put Payoff (Formula)
Payoff = Max [(S-X), 0] = ΔSt - P0 + Max [(X-St), 0]
Δ Delta Range for Calls & Puts (Interval)
Δ Call: [0,1], acts like stock @ 1
Δ Put: [-1,0], acts like stock @ 0
Δ Delta Call Behavior (Example)
ITM Call ~Δ = 1
OTM Call ~Δ = 0
Δ Delta Put Behavior (Example)
ITM Put ~Δ = (-1)
OTM Call ~Δ = 0
Bull Spread (Concept)
Position Gain: ↑ Asset Prices
Position:
1) Sell Call @ High = Cheap
2) Buy Call @ Low = Expensive
Bull Spread Payoff (Formula)
Long Bull Maximum Payoff = (X High - X low) + (C High - C Low)
Bear Spread (Concept)
Position Gain: ↓ Asset Prices = ↑ Gains
1) Buy Put @ High = Expensive
2) Sell Put @ Low = Cheap
Bear Spread Payoff (Formula)
Long Bear Spread Payoff = (X High - X Low) - (P High + P Low)
Straddle (Concept, Example & Payoff)
1) Long Straddle = Buy Call + Buy Put @ X = Long Vol
2) Format: V-shape
Example:
Xc = 2.29 = Long Call @ S + 2.29
Xp = 2.28 = Long Put @ S - 2.28
Σ = 4.57
∴ V-Shape is formed @ (Xc + Xp)
Payoff:
If St > (Xc + Xp) = CALL ITM = (S1-X) - C0 - P0
If St < (Xc + Xp): PUT ITM = (X-S1) - C0 - P0
Collar (3 Formulas)
- Collar = Long Stock + Short Call @ X High + Long Put @ X Low
- Collar = Covered Call + Long Put
- Collar = Protective Put + Short Call
Collar (Concept & Format)
Concept: Sacrifices upside potential to lock losses
Format: Escadinha tradicional c/ minimum profit
Zero Cost Collar (Concept)
Payoff from (+C0) premium and (-P0) premiums cancel each other
Collar Gain
a. If St > XH = Short Call ITM
a. Gain A = [(XH-S0) +C0 -P0]
a. Reason: Locked sell @X High
b. If XH > St > XL = Nothing ITM
b. Gain B = [(St-S0) +C0 - P0]
b. Reason: Get Δ Prices
c. If St < XL = Buy Call ITM
c. Gain C = [(XL-S0) + C0 - P0]
Calendar Spreads (Long and Short)
Long Cal Spread = Sell Near + Buy Long
Short Cal Spread = Buy Near + Sell Long
Calendar Spreads (Concept)
Theta Play. Possible to get Theta Positive.
Volatilty Types (List)
Historical: Observable
Implicit: Derived from Option Pricing Model and Derivatives traded in the market
Volatility Skew (Concept)
Volatility is more steeper for Puts @ Low Strikes
Rationale: Pessimists buy more downside protection than optimists = ↑ Put Prices = ↑ Vol Puts OTM
Tip: ↑ Steeper = Bull Market
Volatility Smile (Concept)
U-Shaped. OTM Calls and OTM Puts are more volatile because they are overpriced.
Risk Reversal Strategy (Description)
Long Risk Reversal = Asset Price will ↑
Buy OTM Call @ X High = Underpriced
Sell OTM Put @ X Low = Overpriced
