Options and Speculative Markets 2003 2004 Trading Strategies

Options and Speculative Markets 2003 -2004 Trading Strategies Professor André Farber Solvay Business School Université Libre de Bruxelles OMS 09 Strategies

Trading strategies 1. A single option and a stock: covered call, protective put • Covered call: S-C • Protective put: S+P 2. Spreads: bull, bear, butterfly, calendar • Bull: +C(X 1) – C(X 2) X 1<X 2 • Bear: +C(X 1) – C(X 2) X 1>X 2 • Butterfly: +C(X 1) + C(X 3) – 2 C(X 2) X 1<X 2<X 3 • Calendar: +C(T 1)-C(T 2) T 1>T 2 3. Combinations: straddle, strips and straps, strangle • Straddle: +C+P • Strip: +C + 2 P • Strap: +2 C+P • Strangle: +C(X 2)+P(X 1) X 1<X 2 August 23, 2004 OMS 09 Strategies 2

Analyzing a strategy • • Initial cost Maximum profit: limited, unlimited Maximum loss: limited, unlimited Breakeven price: when do you recover initial price Standstill return: quid if stock price does not change? Market outlook: bearish, neutral, bullish Risk posture August 23, 2004 OMS 09 Strategies 3

Covered Call Profit At maturity Immediate Stock Price August 23, 2004 OMS 09 Strategies 4

Protective Put August 23, 2004 OMS 09 Strategies 5

Bull Call Spread August 23, 2004 OMS 09 Strategies 6

Bear Call Spread August 23, 2004 OMS 09 Strategies 7

Butterfly August 23, 2004 OMS 09 Strategies 8

Straddle August 23, 2004 OMS 09 Strategies 9

Strip August 23, 2004 OMS 09 Strategies 10

Strap August 23, 2004 OMS 09 Strategies 11

Strangle August 23, 2004 OMS 09 Strategies 12