PowerPoint Presentation
IC 301
Option Trading Strategies
Bullish/bearish vs bullish/bearish on volatility
When investor has a bullish view on the market, he is anticipating a price increase
When investor has a bearish view on the market, he is anticipating a price fall
When investor is bullish on volatility, he thinks that there will be a lot of volatility
When investor is bearish on volatility, he thinks that there will not be much volatility
Types of Strategies
Take a position in the option and the underlying
Spreads: Take a position in 2 or more options of the same type (i.e., two or more calls or two or more puts)
Combination: Take a position in a mixture of calls & puts
Positions in an Option & the Underlying
Covered Call
a long position in a stock plus a short position in a European call option
A covered call will limit the investor’s potential upside profit, and will also not offer much protection if the price of the stock drops.
the reverse of covered call – a short position in a stock plus a long position in a European call option
Protective Put
buying a European put option on a stock and the stock itself
Protective puts act as an insurance by providing downside protection from an asset’s price declines.
Protective puts offer unlimited potential for gains.
the reverse of protective put – a short position in a stock plus a short position in a European put option
Bull Spread Using Calls
Bull spreads can be created by buying a European call option on a stock with a certain strike price and selling a European call option on the same stock with a higher strike price. Both options have the same expiration date.
Bull Spread Using Puts
Bull spreads can also be created by buying a European put with a low strike price and selling a European put with a high strike price.
Bear Spread Using Calls
Bear spreads can be created by buying a European call with a high strike price and selling a European call with a low strike price.
Bear Spread Using Puts
Bear spreads can also be created by buying a European put with a high strike price and
selling a European put with a low strike price.
Ratio Spread
Buy a Call with a strike price K1
Sell 2 Call with a higher strike price K2
Buy a Put with a strike price K1
Sell 2 Puts with a lower strike price K2
Butterfly Spread Using Calls
A butterfly spread involves positions in options with three different strike prices. It can be created by buying a European call option with a relatively low strike price K1, buying a European call option with a relatively high strike price K3, and selling two European call options with a strike price K2, that is hallway between K1 and K3.
Butterfly Spread Using Puts
Butterfly spreads can also be created using put options. The investor buys two European puts, one with a low strike price, K1 and one with a high strike price, K3, and sells two European puts with an intermediate strike price.
Straddle Combination
Straddle is a popular combination, which involves buying a European call and put with the same strike price and expiration date.
/docProps/thumbnail.jpeg