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Review of Options Trading Strategies.

Review of Options Trading Strategies.

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    Options Trading Strategies Options Trading Strategies Presentation Transcript

    • Options Trading Strategies StockStream LLP
    • Disclaimer
      • Trading carries significant risk of losses and may not be suitable for all investors. Traders should assess these risks either themselves or in consultation with a financial advisor before investing.
      • There is no guarantee that the trading techniques, methods and other information in this presentation will result in profits. The content in this presentation in only intended for educational and informational purposes and not intended as trading recommendation.
      • The content of this presentation is subject to change without notice.
      • Stockstream Financial Advisory Services LLP or mystockstream.com will not take any liability or accountability of losses arising from the use of information in this presentation in any manner.
    • StockStream Education Model
    • Derivatives
        • A derivative is a financial product whose value is derived from the price of an underlying asset.
        • The underlying asset for a derivative may be a currency, commodity, equity or any other asset.
        • Derivatives are important for portfolio risk management and allow risks to be separated and traded.
        • Derivatives are of the following three types
          • Futures and Forwards
          • Options
          • Swaps
    • Introduction
        • An Option is a contract that gives the buyer the right but not the obligation to buy (if long a call option) or sell (if long a put option) an asset at a particular price (exercise price) at a certain time in the future (expiry date).
        • The seller of an option (option writer) collects a price from the buyer.
        • The buyer of the option earns the right to buy or sell the underlying asset at a particular price in the future.
    • Terminology
        • European Options : This option can only be exercised t the expiry date.
        • American Options : This option can be exercised on or before the expiry date. These are more expensive compared to European Options.
        • In the Money Option (ITM) : A call option is in the money if its Strike Price < Spot price of the asset. The reverse is true for a put option.
        • Out Of the Money Option (OTM) : A call option is out of the money if its Strike Price > Spot price of the asset. The reverse is true for a put option.
        • At the money Option (ATM) : An option is at the money if its Strike Price = Spot Price of the asset.
        • Intrinsic Value : This is the amount by which an option is in the money. Intrinsic Value is always >= 0 i.e. for OTM and ATM Options the intrinsic value = 0.
        • Time value of Money : This is the difference between the option premium and its intrinsic value. The longer the time to expiry the greater is the time value of an option.
          • Gives the right to buy an asset at the Exercise Price on expiry.
          • This strategy is used when the investor is bullish on the underlying asset.
          • The buyer pays a price (Call Premium) for the call.
      Long Call
          • Max Risk: Limited to the premium paid to acquire the option
          • Max Reward: Unlimited. Increases as the stock price increases.
          • Breakeven: This is achieved when Spot Price of Asset = Strike Price + Call Premium.
          • Call writer has the obligation to sell the asset at the strike price if the option is exercised.
          • This strategy is used when the investor is extremely bearish on the underlying asset.
      Short Call
          • Max Risk: Unlimited. Loss increases as the stock price increases.
          • Max Reward: Limited to the amount of premium collected from the call buyer.
          • Breakeven: This is achieved when Spot Price of Asset = Strike Price + Call Premium.
          • This strategy involves buying the underlying asset and writing a call on it with a higher exercise price.
          • This strategy is used when the investor is neutral to moderately bullish on the stock.
      Covered Call
          • Max Risk: Stock Price Paid – Call Premium. Loss increases as the stock price decreases.
          • Max Reward: Call Exercise Price + Call Premium – Stock Price Paid
          • Breakeven: This is achieved when Spot Price of Asset - Call Premium Received = Stock Price Paid
          • Gives the buyer the right to sell the underlying asset at the exercise Price.
          • This strategy is used when the investor is bearish on the underlying asset.
          • The buyer pays a price (Put Premium) for the put.
      Long Put
          • Max Risk: Limited to the Put Premium.
          • Max Reward: Put Exercise Price – Put Premium.
          • Breakeven: This is achieved when Spot Price of Asset = Exercise Price - Put Premium
          • Put writer has an obligation to buy the underlying asset at the exercise price.
          • This strategy is used when the investor is bullish on the underlying asset.
          • The put writer receives a price for the put.
      Short Put
          • Max Risk: Put Exercise Price – Put Premium.
          • Max Reward: Limited to the Put Premium.
          • Breakeven: This is achieved when Spot Price of Asset = Exercise Price - Put Premium
          • Involves selling an OTM Put Option and taking a short position in the underlying asset.
          • This strategy is used when the investor is neutral to bearish on the underlying asset.
      Covered Put
          • Max Risk: Unlimited. Increases as the stock price increases.
          • Max Reward: Sell price of stock + Put Premium – Put Strike Price
          • Breakeven: This is achieved when Spot Price of Stock = Sell Price of Stock + Put Premium
          • Involves buying an ITM Call Option and Selling an OTM Call Option.
          • This strategy is used when the investor moderately bullish of the stock. This results in lower cost and breakeven compared to a long call strategy.
      Bull Call Spread
          • Max Risk: ITM Call Premium – OTM Call Premium
          • Max Reward: OTM Call Exercise Price – ITM Call Exercise Price – ITM Call Premium + OTM Call Premium
          • Breakeven: This is achieved when Spot Price of Stock = Exercise Price of ITM Call + (ITM Call Premium - OTM Call Premium)
          • Involves selling an ITM Call Option and buying an OTM Call Option.
          • This strategy is used when the investor moderately bearish on the stock. This results in upfront income and limited risks compared to a short call.
      Bear Call Spread
          • Max Risk: OTM Call Exercise Price – ITM Call Exercise Price - ITM Call Premium + OTM Call Premium
          • Max Reward: ITM Call Premium – OTM Call Premium
          • Breakeven: This is achieved when Spot Price of Stock = Exercise Price ITM Call + (ITM Call Premium - OTM Call Premium)
          • Involves selling an OTM Put Option and buying a further OTM Put Option.
          • This strategy is used when the investor moderately bullish on the stock. This results in upfront income and limited risks from a short put.
      Bull Put Spread
          • Max Risk: OTM Put Exercise Price – Further OTM Put Exercise Price + OTM Put Premium – Further OTM Put Premium
          • Max Reward: OTM Put Premium – Further OTM Put Premium
          • Breakeven: This is achieved when Spot Price of Stock = Exercise Price OTM Put - (OTM Put Premium – Further OTM Put Premium)
          • Involves buying an ITM Put Option and selling a OTM Put Option.
          • This strategy is used when the investor moderately bearish on the stock. This results is lower cost and higher breakeven compared to a long put.
      Bear Put Spread
          • Max Risk: ITM Put Premium – OTM Put Premium
          • Max Reward: ITM Put Exercise Price – OTM Put Exercise Price + OTM Put Premium – ITM Put Premium
          • Breakeven: This is achieved when Spot Price of Stock = Exercise Price ITM Put - (ITM Put Premium – OTM Put Premium)
          • Involves buying an Put and Call with the same exercise price and maturity date.
          • This strategy is used when the investor expects the index to show large price movement but is not sure about the direction.
      Long Straddle
          • Max Risk: Put Premium + Call Premium
          • Max Reward: Unlimited. Increases as the stock price increases or decreases.
          • Breakeven: This is achieved when Spot Price of Stock is either Exercise Price + Max Risk OR Exercise Price - Max Risk
          • Involves selling an Put and Call with the same exercise price and maturity date.
          • This strategy is used when the investor expects the stock to remain range bound and exhibit low levels of volatility.
      Short Straddle
          • Max Risk: Unlimited. Increases when stock price increases or decreases from the exercise price.
          • Max Reward: Call Premium + Put Premium
          • Breakeven: This is achieved when Spot Price of Stock is either Exercise Price + Max Reward OR Exercise Price - Max Reward
          • Involves buying a slightly OTM Put and a slightly OTM Call.
          • This strategy is used when the investor expects the index to show large price movement but is not sure about the direction. It is cheaper than a long straddle.
      Long Strangle
          • Max Risk: Call Premium + Put Premium
          • Max Reward: Unlimited. Increases as the stock price increases or decreases.
          • Breakeven: This is achieved when Spot Price of Stock is either Call Exercise Price + Max Risk OR Put Exercise Price - Max Risk.
          • Involves selling a slightly OTM Put and a slightly OTM Call.
          • This strategy is used when the investor expects the stock to exhibit low levels of volatility. Improves profitability of a Short Straddle by widening the breakeven points.
      Short Strangle
          • Max Risk: Unlimited. Increases when stock price increases or decreases.
          • Max Reward: Call Premium + Put Premium
          • Breakeven: This is achieved when Spot Price of Stock is either Call Exercise Price + Max Reward OR Put Exercise Price - Max Reward
          • Involves buying an OTM Put and an OTM Call.
          • This strategy is used when the investor is bullish on the stock. This strategy simulates a long stock payoff, except for the gap between expiries of the options, but only at a fraction of the cost.
      Long Combo
          • Max Risk: Put Exercise Price - Put Premium + Call Premium. Increases when stock price decreases.
          • Max Reward: Unlimited. Increases when stock price increases.
          • Breakeven: This is achieved when Spot Price of Stock = Call Exercise Price - Put Premium + Call Premium.
          • Involves buying a stock, an OTM or ATM Put and selling an OTM Call.
          • This strategy is used when the investor is mildly bullish on the stock, but wants to protect himself from any unexpected falls.
      Collar
          • Max Risk: Stock buy Price – Put Exercise Price + Put Premium - Call Premium
          • Max Reward: Call Exercise Price – Stock Buy Price - Put premium + Call Premium
          • Breakeven: This is achieved when Spot Price of Stock = Stock Buy Price + Put Premium - Call Premium.
          • Involves buying an OTM Call, buying an ITM Call and selling two ATM Calls
          • This strategy is used when the investor is expecting range bound and low volatility markets. This strategy is similar to a short straddle with limited losses.
      Long Butterfly Call
          • Max Risk: 2 * ATM Call Premium – ITM Call Premium – OTM Call Premium
          • Max Reward: Exercise Price Long Call (OTM or ITM) – Exercise Price ATM Call – Max Risk
          • Breakeven: This is achieved when Spot Price of Stock = Call Exercise Price (OTM) – Max Risk OR Call Exercise Price (ITM) + Max Risk
          • Involves selling an OTM Call, selling an ITM Call and buying two ATM Calls.
          • This strategy is used when large price movement are expected but their direction is uncertain. It offers low returns compared to a straddle with slightly lower risk.
      Short Butterfly Call
          • Max Risk: Exercise Price OTM Call – Exercise Price ATM Call – Max Reward (Assuming (OTM – ATM) Exercise = (ATM – ITM) Exercise)
          • Max Reward: ITM Call Premium + OTM Call Premium - 2 * ATM Call Premium
          • Breakeven: This is achieved when Spot Price of Stock = Call Exercise Price (OTM) - Max Reward OR Call Exercise Price (ITM) + Max Reward
          • Involves selling a lower OTM Call, buying a higher OTM Call buying a lower ITM Call and selling a higher ITM Calls.
          • This strategy is used when low price volatility is expected in the markets. This is similar to a long butterfly call but with a greater profitability area.
      Long Candor Call
          • Max Risk: Strategy Cost = Higher OTM Call Premium + Lower ITM Call Premium – Higher ITM Call Premium – Lower OTM Call Premium.
          • Max Reward: Higher ITM Call Exercise Price – Lower ITM Call Exercise Price – Strategy Cost.
          • Breakeven: (1) Highest Exercise Price (OTM) – Strategy Cost,
          • (2) Lowest Exercise Price (ITM) + Strategy Cost
          • Involves buying a lower OTM Call, selling a higher OTM Call selling a lower ITM Call and buying a higher ITM Calls.
          • This strategy is used when large price movement are expected but their direction is uncertain.
      Short Candor Call
          • Max Risk: Higher ITM Call Exercise Price – Lower ITM Call Exercise Price - Premium Received.
          • Max Reward: Higher OTM Call Premium + Lower ITM Call Premium – Higher ITM Call Premium – Lower OTM Call Premium.
          • Breakeven: (1) Highest Exercise Price (OTM) – Premium Received, (2) Lowest Exercise Price (ITM) + Premium Received
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