Speakers:
Beesham Lal
Umar Farooq
Introduction
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Strategy is formed by appropriate
mixture of put and call options
depending on preferences of trader
Strategy is commonly used to make
profit from movements in prices
Strategy can also be used by an
individual for hedging and insurance
Market circumstances
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Bullish
Bearish
Neutral-bullish in volatility
Neutral-bearish in volatility
Long call
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Long 1 at-the-money call option
Almost certain that price would move upward
Bull call spread
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Long 1 in-the-money call & short 1 out-of-money call
Prices are expected to go up moderately
Reduces cost by forgoing unlimited profit
Call back spread
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Short 1 in-the-money call & long 2 out-of-money call
Expects big move in prices of high volatile security
Cost can be zero with proper choice of calls
Long put
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Long 1 at-the-money put option
Almost certain that price would move downward
Bear put spread
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Short 1 in-the-money put & long 1 out-of-money put
Prices are expected to go down moderately
Reduces cost by forgoing some profit potential
Put back spread
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Short 1 in-the-money put & long 2 out-of-money put
Expects big downward move in prices of high volatile assets
Cost can be zero with proper choice of puts
Short strangle
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Short 1 out-of-money put & short 1 out-of-money call
Expects prices to remain stable with bearish in volatility
Unlimited loss if got betrayed by expectations
Short butterfly spread
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Short 1 out-of-money put, long 1 at-the-money put, long 1
at-the-money call and short 1 out-of-money call
Expects prices to remain stable with bullish in volatility
Unlimited loss if got betrayed by expectations
Pay later strategy
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Holds underlying asset, long 2 put options with same strike price & short
1 put option
Net premium is zero
Needs insurance if price goes down but wants full profit if prices move up
Pays for insurance only if it is needed
Price of
underlying asset
at time of maturity
Payoff of unPayoff on 2
hedged asset with purchased l00
current price of 80 strike put options
Payoff of written
112.93 strike put
option
Combined payoff
60
-20
80
-52.93
7.07
70
-10
60
-42.93
7.07
80
0
40
-32.93
7.07
90
10
20
-22.93
7.07
100
20
0
-12.93
7.07
110
30
0
-2.93
27.07
112.93
32.93
0
0
32.93
120
40
0
0
40
Conclusion
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An individual can combine different
options depending on his needs
Trader can lose a lot of money if her
expectations are not up to date
QUESTIONS