11.1
Trading Strategies Involving Options
Chapter 11
11.2
Three Alternative Strategies
Take a position in the option and the underlying asset
Take a position in 2 or more options of the same type, i.e. all calls or all puts (spread)
Combination: Take a position in a mixture of calls & puts (combination)
11.3
Positions in an option & the underlying stock (put-call parity)
Profit
STK
Profit
ST
K
Profit
ST
K
Profit
STK
(a) Short put (b) Long put
(c) Long call (d) Short call
11.4
Bull Spread Using Calls(buy low K, sell high K)
K1 K2
Profit
ST
11.5
Bull Spread Using Puts(buy low K, sell high K)
K1 K2
Profit
ST
11.6
Bear Spread Using Puts(buy high K, sell low K)
K1 K2
Profit
ST
11.7
Bear Spread Using Calls (buy high, sell low K)
K1 K2
Profit
ST
11.8
Box Spread
A combination of a bull call spread and a bear put spread
Payoff diagram looks like a box If all options are European a box spread is
worth the present value of the difference between the strike prices
If they are American this is not necessarily so
11.9
Butterfly Spread Using Calls(buy lowest and highest K, sell 2 intermediate K)
K1 K3
Profit
STK2
11.10
Butterfly Spread Using Puts(buy highest and lowest K, sell 2 intermediate K)
K1 K3
Profit
STK2
11.11
Calendar Spread Using Calls(short short, long long; at short maturity date) Result looks like a butterfly spread
Profit
STK
11.12
Calendar Spread Using Puts (short short, long long; at short maturity date) Result looks like a butterfly spread
Profit
STK
11.13
A Straddle Combination: long call and put (same K, same expiry)
Profit
STK
11.14
Strip (2 puts, 1 call) & Strap (2 calls, 1 put)
Profit
K ST
Profit
K ST
Strip Strap
11.15
A Strangle: similar to straddle but call K > put K
K1 K2
Profit
ST
11.16
Strangle not!: what if call K < put K?
K1 K2
Profit
ST