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