Option_Trading_Strategies.handout

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1、NotesOptionTradingStrategiesMatthiasBuehlmaier,PhDAssistantProfessorofFinanceTheUniversityofHongKong1NotesPartICombinationsandSpreadsMFIN7009,Nov.&Dec.20112CombinationsandSpreadsareOptionsTradingStrategiesNotes•Acombinationisanypositioninvolvingbothputandcalloptions

2、onthesameunderlyingthatisnotastraddle•Somedefinitionsalsoincludeastraddle•Combinationsaresimilartoadifferenttypeofoptiontradingstrategy,namelyoptionsspreads•Aspreadstrategyisanyoptionpositionhavingbothlongandshortoptionsofthesametypeonthesameunderlyingsecurity•Combina

3、tionsandspreadsarebuiltusingvariouscombinationsofEuropeancallandputoptions3NotesPartIIStraddleMFIN7009,Nov.&Dec.20114StraddleCombinesCallsandPutsNotes•Astraddleisthepurchaseorsaleofanequalnumberofputsandcallshavingthesameterms•Astraddleisaninvestmentstrategythatallo

4、wstheholdertoprofitbasedonhowmuchthepriceoftheunderlyingsecuritymoves,regardlessofthedirectionofpricemovement•ThisisdonebycombiningaEuropeancallandaEuropeanputwiththesamestrikepriceandmaturity•Buyingthecallandtheputoptionisknownasalongstraddle•Shortingthecallandthepu

5、toptionisashortstraddle5LongStraddleNotes•Theownerofalongstraddlemakesaprofitiftheunderlyingpricemovesalongwayfromthestrikeprice,eitheraboveorbelow•Thus,aninvestormaytakealongstraddlepositionifhethinksthemarketishighlyvolatile,butdoesnotknowinwhichdirectionitisgoingt

6、omove•Thispositionisalimitedrisk,sincethemostapurchasermayloseisthecostofbothoptions•Atthesametime,thereisunlimitedprofitpotentialMFIN7009,Nov.&Dec.20116ProfitofLongStraddleNotesprofitSTK•ThereddotshowstheapproximatestockpriceattÆ0•Goinglongtheputyieldsthedecreasingpar

7、tontheLHS•GoinglongthecallyieldstheincreasingpartontheRHS7ShortStraddleNotes•Ashortstraddleisanoptionstradingstrategythatinvolvessimultaneouslysellingaputandacallofthesameunderlyingsecurity,strikepriceandexpirationdate•Theprofitislimitedtothepremiumsoftheputandcall,b

8、utitisriskybecauseiftheunderlyingsecurity’spricegoesveryhighuporverylowdown,thepotentiallossesareunlimited•Thisstrategyiscallednon-directi