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Types of Strategies

* Covered Strategies: Take a position in the option and the underlying
* Spread Strategies: Take a position in 2 or more options of the same type (A spread)
* Combination Strategies: Take a position in a mixture of calls & puts (A combination)

Types of Strategies

* Note the following standard symbols
* C = current call price, P = current put price
* S0 = current stock price, ST = stock price at expiration
* T = time to expiration
* X = exercise price
* P = profit from strategy
* The following will represent the number of calls, puts and stock held
* NC = number of calls
* NP = number of puts
* NS = number of shares of stock

Types of Strategies

* These symbols imply the following:
* NC or NP or NS > 0 implies buying (going long)
* NC or NP or NS < 0 implies selling (going short)
* The Profit Equations
* Profit equation for calls held to expiration
* P = NC[Max(0,ST - X) - C]
* For buyer of one call (NC = 1) this implies
* P = Max(0,ST – X) – C
* For seller of one call (NC = -1) this implies
* P = -Max(0,ST – X) + C

Types of Strategies

* The Profit Equations (continued)
* Profit equation for puts held to expiration
* P = NP[Max(0,X - ST) - P]
* For buyer of one put (NP = 1) this implies P = Max(0,X – ST) – P
* For seller of one put (NP = -1) this implies P = -Max(0,X – ST) + P

Category : Option Trading
Website : userwww.sfsu.edu
Language : English
Size : 420 Kb
Download Trading Strategies Involving Options.ppt

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