Four Basic Strategies 3 Value of Option at

Four Basic Strategies 3

Value of Option at Expiration Payoff Holder Writer Premium 0 Stock price 4

Why Option 5

Put Option at Expiration Long Put Short Put 6

Income Strategies 7

Strategy: Covered Call Action: Buy Stock + Sell OTM Call Stock Covered Call Written call 8

Strategy: Covered Call Action: Buy Stock + Sell OTM Call Outlook: Neutral to Bullish Rationale: Buy stock for medium to long term and capturing monthly income by selling call every month If the stock rise sell the stock to deliver If stock falls, keep the premium 9

Protective Put Payoffs Put Stock Protective put 0 10

Bull Put Spread Long lower strike put Write OTM put 11

Bear Call Spread Action Sell lower strike call Buy OTM call Outlook: bearlish or neutral to bearish 12

Long Iron Butterfly Buy lower strike put+sell middle strike put and call+Buy higher strike call 13

Other Income Strategies Covered Short Straddle Buy stock + Sell put + Sell call Outlook: Bullish Covered Short Stragle Long stock + Short OTM put + Short OTM call Outlook: bullish Calendar call Buy long maturity call + Sell Short term call 14

Volatility Strategies 15

Volatility Trading: Definition Trading strategies designed to speculate on change in the volatility of the market or stock instead of its direction. The point is that you don’t care which direction it moves (up or down), as long as it moves explosively in one direction or the other. The trick is spotting something that’s about to make that move 16

Volatility Trading Long volatility: Buy call & sell stock Buy put & buy stock Short volatility Sell call & buy stock Sell put & sell stock 17

Volatility Trading: Call & Put Value VS Stock Price 18

Volatility Trading 19

Long Volatility 1: Long Call & Short Stock 20

Long call & Short stock 21

Long Call & Short Stock: Delta neutral 22

Delta neutral VS Not neutral 23

Long Volatility using Long call Short Stock 24

Long Volatility using Long call Short Stock 25

Long Call & Short Stock with changing volatility 26

Long Volatility: Buy Put Buy Stock Payoffs Put Stock Protective put 0 27

Long Volatility: Buy Put Buy Stock 28

Long volatility using Long Put & Long Stock 29

Short Volatility Covered Call : Short OTM call & Long Stock Covered Call Written call 30

Short Volatility I: Covered call 31

Short volatility using covered call 32

Short volatility: Sell put + Sell stock 33

Short volatility: Sell put + Sell stock Payoff 34

Short volatility: Sell put + Sell stock Payoff Zoom 35

Other Strategies Straddle Long Call and Long Put Strangle Strip Strap Short Bitterfly Short Condors 36

Straddle Long call + long put with same exercise price A Long call +B Long put Straddle =C P+C 37

A Straddle Combination ©A straddle involves buying a call and put with the same strike price and expiration date. Profit K ST 38

Straddle 39

Long volatility using straddle 40

Strip Profit K ST ©A strip consists of a long position in one call and two puts with the same strike price and expiration date. 41

Strap ©A strap consists of a long position in two calls and one put with the same strike price and expiration date. Profit K ST 42

Using Volatility 43

Volatility Implied volatility is a market forecast of the future volatility of the underlying stock or index Long volatility position gains when realized volatility is higher than implied volatility at inception Changes in implied volatility affect the MTM of the position 44

Can volatility be forecasted? Volatility cannot be predicted over long periods of time Option market can provide “market forecasts” for period ranging from 1 month to 1 year Statistical models may be used to forecast volatility over short periods of time Importance of taking into “exogenous news” and events, macro news 45

VIX Index VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Referred to by some as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period. 46

VIX Index Russia/LTCM ENRON WCOM SE Asia Shanghai Surprise Subprime Figure 3: VIX index of S&P implied volatility Source: MFC, Bloomberg 47

Traditional SD & GARCH 49

SET 50 & Volatility(EGARCH( 50

Using MA & Traditional SD for Trading Signal 51

GARCH & MA as a signal (1 Yr data( 52