lecture option strategies

Trading Strategies Involving Options05 LectureDr. Guillermo Benavides

05 LectureTrading StrategyA combinations strategy involves taking a position in both calls and puts on the same underlying asset. It is appropriate strategy if the investors believes that the underlying asset price will be very volatile.

05 LectureSpreadsA trading strategy that involves taking a position in two or more options of the same type (i.e. two or more calls or two or more puts).

05 LectureBull spreadIt is created by buying a call option on a stock with a certain strike price and selling a call option on the same stock with a higher strike price. Both options have the same expiration date.Investor hopes stock price will increase.

Bull Spreads : Call Options

LossProfit (Pesos/USD)+ 1.00+ 0.500- 0.50- 1.00K1K2Precio spot(Pesos/USD)

Bull Spreads: Put Options


05 LectureBear spreadBuying a call with one strike price and selling a call with a lower strike price. Both calls expire at the same date.Investor hopes stock price will decrease.

Bear Spreads: Call Options



Bear Spreads: Put Options

05 LectureButterfly spreadInvolves taking positions in options with three different strikes.Buying a call option with a relatively low strike price, buying a call option with a relatively high strike price and selling two calls with a strike price halfway between the stike prices of the long positions.

05 Lecture

05 LectureFor the previous Table, the payoffs are calculated usig the relationship K2 = 0.5(K1 + K3)

LossProfit (Pesos/USD)+ 1.00+ 0.500- 0.50- 1.00K1K2Precio spot(Pesos/USD)Butterfly Spread: Call OptionsK3

05 LectureStraddleInvolves buying a call and put with the same strike price and expiration date.

LossProfit (Pesos/USD)+ 1.00+ 0.500- 0.50- 1.00KPrecio spot(Pesos/USD)Straddle

05 LectureStrangleAlso called a bottom vertical combination involves buying a call and a put with the same expiration date but different exercise prices.

LossProfit (Pesos/USD)+ 1.00+ 0.500- 0.50- 1.00K1Precio spot(Pesos/USD)StrangleK2

05 LectureRisk-reversalInvolves taking a long position on an out-of-the-money call and short position in an out-of-the-money put with the same time to expiration.

Risk-ReversalLossProfit (Pesos/USD)+ 1.00+ 0.500- 0.50- 1.00Precio spot(Pesos/USD)K1K2K3

05 LectureBarrier optionsOptions where the payoffs depends on whether the underlying assets price reaches a certain level during a certain period of time.These type of options normally trade in the over-the-counter market.They are attractive because are less expensive than relevant regular options.

05 LectureKnock-out and knock-in optionsA knock-out option ceases to exist when the underlying asset price reaches a certain barrier; a knock-in option comes into existence only when the underlying asset price reaches a barrier.

05 LectureA down-and-out call is one type of knock-out option. It is a regular call option that ceases to exist if the asset price reaches a certain barrier, say, H. The barrier level is below the initial asset price.The corresponding knock-in option is a down-and-in call. This is a regular call that comes into existence only if the asset price reaches the barrier level.

05 LectureAn up-and-out put is a put option that ceases to exist when a barrier, H, that is greater than the current asset price is reached. An up-and-in put is an option that comes to existence only if the barrier is reached.A down-and-out put is a put that ceases to exist when a barrier less than the current asset price is reached.

05 LectureA down-and-in put is a put option that comes into existence only when the barrier is reached.

(Pesos/USD)1413121110HKKnock-Out: Up & Out Call H>KBarrier OptionsTimeCeases to exists

(Pesos/USD)1413121110HKnock-In: Up & In Call H

(Pesos/USD)1413121110HKKnock-In: Up & In Call H>KBarrier OptionsTimeComes to existence

(USD/Pesos)0.100.090.080.070.05HKnock-Out: Down & Out: Put (Sell Pesos) H

HKKnock-In: Down & In Put H>KBarrier OptionsTimeComes to existence0.100.090.080.070.05(USD/Pesos)

HKKnock-in: Down & In: Put H

lecture option strategies

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