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Chapter 12

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192 views

Chapter 12

Uploaded by

Riyad Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

Chapter 12

Trading Strategies Involving


Options

Options, Futures, and Other Derivatives, 10th


Edition, Copyright © John C. Hull 2017 1
Strategies to be Considered
• Bond plus option to create principal
protected note
• Stock plus option
• Two or more options of the same type (a
spread)
• Two or more options of different types (a
combination)

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 2
Principal Protected Note
• Allows investor to take a risky position without
risking any principal
• Example: $1000 instrument consisting of
• 3-year zero-coupon bond with principal of $1000
• 3-year at-the-money call option on a stock portfolio
currently worth $1000

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 3
Principal Protected Notes continued
• Viability depends on
• Level of dividends
• Level of interest rates
• Volatility of the portfolio
• Variations on standard product
• Out of the money strike price
• Caps on investor return
• Knock outs, averaging features, etc

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 4
Positions in an Option & the Underlying
(Figure 12.1, page 255)

Profit Profit

K
K ST ST
(a)
(b)
Profit Profit

K
ST K ST

(c) (d)
Options, Futures, and Other Derivatives, 10th Edition,
Copyright © John C. Hull 2017 5
Bull Spread Using Calls
(Figure 12.2, page 256)

Profit

ST
K1 K2

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 6
Bull Spread Using Puts
Figure 12.3, page 258

Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 7
Bear Spread Using Puts
Figure 12.4, page 258

Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 8
Bear Spread Using Calls
Figure 12.5, page 259
Profit

K1 K2 ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 9
Box Spread
• A combination of a bull call spread and a bear
put spread
• 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
(see Business Snapshot 11.1)

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 10
Butterfly Spread Using Calls
Figure 12.6, page 260
Profit

K1 K2 K3 ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 11
Butterfly Spread Using Puts
Figure 12.7, page 262

Profit

K1 K2 K3 ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 12
Calendar Spread Using Calls
Figure 12.8, page 263

Profit

ST
K

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 13
Calendar Spread Using Puts
Figure 12.9, page 264

Profit

ST
K

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 14
A Straddle Combination
Figure 12.10, page 265

Profit

K ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 15
Strip & Strap
Figure 12.11, page 266

Profit Profit

K ST K ST

Strip Strap
Options, Futures, and Other Derivatives, 10th Edition,
Copyright © John C. Hull 2017 16
A Strangle Combination
Figure 12.12, page 267

Profit

K1 K2
ST

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 17
Other Payoff Patterns
• When the strike prices are close together a
butterfly spread provides a payoff consisting
of a small “spike”
• If options with all strike prices were available
any payoff pattern could (at least
approximately) be created by combining the
spikes obtained from different butterfly
spreads

Options, Futures, and Other Derivatives, 10th Edition,


Copyright © John C. Hull 2017 18

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