Trading strategies involving options
C H A P T E R Trading StrategiesInvolving OptionsWe discussed the profit pattern from an investment in a single option in Chapter Inthis chapter we cover more fully the range of profit patterns obtainable using options. The profit will be shown as the final payoffminus the initial cost. We assume that the underlying asset is a stock. In the first section we consider what happens when a position in a stock option iscombined with strategies position in the stock itself. A payoff function is the payoff as a function of thestock price. Similar results can be obtained forother underlying assets, such as foreign currencies, stock indices, and futures con-tracts. In Figure The options used in involving strategies we discuss are European. In theory, it should be calculated as the present value of the finalpayoff minus the initial cost. One of the attractions of options is that they can be used to create a widerange of different payoff functions If European options were available with every single possible strike price,then any payoff function could in theory be created The profits from these are illustrated in Figure This is known as writing a covered call. For ease of exposition, the figures and tables showing the profit from a tradingstrategy will ignore the time value of money. American optionsmay lead to slightly different outcomes because of the possibility of early exercise. The long stock position"covers" or protects the investor from the payoff on the short call that becomesnecessary if there is a sharp rise in the stock price. In this figureand in other figures strategies this chapter, the options line shows the relationshipbetween profit and the stock price for the individual securities constituting theportfolio, whereas the solid line shows the relationship between profit and the stockprice for the whole portfolio. In this chapter, we look at what can be achieved when an option is traded in conjunction with other assets. In particular, we examine the properties of portfol Chapter 6 Generalized Synthetic Annuities Chapter 21 Option Applications and Corporate Finance Chapter 10 Currency Options Chapter 18 The Greek letters The Greek Letters A financial institution that sells an option to a client in the over-the-counter markets is faced with the options of managing its risk. If the option happens to be the same as one that is options on an exchange, the financial institution can neutralize its expos Chapter 14 Exotic Options: I Chapter 5 Managing a Covered Synthetic Annuity Managing a Covered Synthetic Annuity The performance of a Strategies over time depends on how volatile the underlying security is and how it is adjusted. The goal is to main- tain a reasonable level of exposure to the underlying security so that theta remains high and the leve Chapter 9 Mechanics of options markets Chapter 2 An Introduction to Forwards and Options Chapter 10 Binomial Option Pricing: Basic Concepts Binomial Option Pricing: Basic Concepts In earlier chapters we discussed how the price of one option is related to the price of another,but we did not explain how to determine the price of an option relative to the price of the underlying asset. In this chapter we discuss the Chapter 16 Futures Options C H A P T E R Futures Options The options we have considered so far provide the holder with the right to buy or sell a certain asset by a certain date for a certain price. They are sometimes termed options on spot or spot options because, when the options are exercised, the sale Chapter 17 The Greek Letters C H A P T Options R The Greek Letters A financial institution that sells an option to a client in the over-the-counter market is faced with the problem of managing its risk. If the option happens to be the same as one that involving traded on an exchange, the financial institution can neutral Chapter 9 Mechanics of Options Markets C H A P T E R Mechanics of Options Markets The rest of this book is, for the most part, concerned with options. This chapter explains how options markets are organized, what terminology is used, how the contracts are traded, how strategies requirements are set, and so on. Later chapt Chapter 20 Corporate Risk Management Chapter 15 Options on Stock Indices trading Currencies Chapter 10 Trading of Stock Options Chapter 17 Real Options Real Options Thus far we have primarily discussed financial assets, but many of the most importantdecisions that firms make concern real assets, a term that broadly encompasses factories, mines, office buildings, research and development, and other nonfinancial firm assets. In Recommended Topics cash flow diagram merton model collateralized debt obligations credit event credit enhancement recovery rate trading of default corporate involving principal value risk free rate credit involving risk neutral expected loss asset manager credit risk basis points black scholes credit spread total return right to buy Recommended Courses St. John"s University LES St.
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