Basic Option Strategies
•
•
•
•
•
•
•
Long Call
Long Put
Short Call
Short Put
Long Straddle
Short Straddle
Box Spread
- 32 -
Long Call
$
0
-C
X
S
X+C
- 33 -
Long Call
Short Call
$
C
$
0
-C
0
S
X
X+C
X+C
S
X
- 34 -
$
0
-C
$
0
-P
S
X
X+C
Short Call
Long Call
Long Put
$
C
0
X+C
X
S
X-P
X
S
- 35 -
$
0
-C
S
X
X+C
Long Put
$
Short Call
Long Call
Short Put
X
-P
0
X+C
S
X
$
P
X-P
0
$
C
0
S
X
S
X-P
- 36 -
0
-C
S
X
X+C
Long Put
$
X-P
0
X
-P
$
0
-(P+C)
S
Short Call
$
Short Put
Long Call
Long Straddle
$
C
0
X+C
S
X
$
P
0
X
S
X-P
X-P-C
X
S
X+P+C
- 37 -
0
-C
S
X
X+C
X-P
0
X
-P
Long
Straddle
Long Put
$
$
0
-(P+C)
S
$
C
Short Call
$
X+C
0
S
X
$
P
Short Put
Long Call
Short Straddle
0
X
X-P
$
P+C
X-P-C
X+P+C
0
S
X
S
X+P+C
X
X-P-C
S
- 38 -
Box Spread
• Long call, short put, exercise = X
• Same as buying a futures contract at X
$
0
X
S
- 39 -
Box Spread
• Long call, short put, exercise = X
• Short call, long put, exercise = Z
$
0
Z
X
S
- 40 -
Box Spread
• You have bought a futures contract at X
• And sold a futures contract at Z
$
0
Z
X
S
- 41 -
Box Spread
• Regardless of stock price at expiration
– you’ll buy for X, sell for Z
– net outcome is Z - X
$
0
Z
X
S
Z-X
- 42 -
Box Spread
• How much did you receive at the outset?
+ C(S,Z,t) - P(S,Z,t)
- C(S,X,t) + P(S,X,t)
$
0
Z
X
S
Z-X
- 43 -
Box Spread
Because of Put/Call Parity, we know:
C(S,Z,t) - P(S,Z,t) = S - B(Z,t)
- C(S,X,t) + P(S,X,t) = B(X,t) - S
$
0
Z
X
S
Z-X
- 44 -
Box Spread
• So, building the box brings you
S - B(Z,t) + B(X,t) - S
= B(X,t) - B(Z,t)
$
0
Z
X
S
Z-X
- 45 -
Assessment of the Box Spread
• At time zero, receive PV of X-Z
• At expiration, pay Z-X
• You have borrowed at the T-bill rate.
$
0
Z
X
S
Z-X
- 46 -