Futures and Options report on Advance Options Strategies
A Group Project Of Futures & Options On Advance Options Strategies Submitted to: Dr. SampadaKapseSubmitted by:ChandanPahelwani – 11047NikunjGajara – 11046NeerajParihar - 11052Atirek Sharma – 11074YashwantVaishnav– 11093
MONEY SPREAD (Vertical Spread) USING CALLSMoney Spread refers to a portfolio that contains same type of option with thesame expiration date but different exercise prices. A money spread has twoforms, bullish and bearish.In bullish money spread investor: buy call at lower price write call at higher priceIn bearish money spread investor: buy call at higher price write call at lower priceHere is the example of bullish money spread using call options.Question:-SBI share price on 8th September, 2012 is INR 1897. Two Call options are availablewith maturity date on 27th September, 2012 with different exercise prices. Theprice of 1st call option with an exercise price of INR 2000 is INR 15 and price of 2ndcall option with an exercise price of INR 1900 is INR 48. What would be the gainsand losses if you enter into bullish money spread using calls?
Answer:Initial investment and the value of the bullish money spread on the expirationdate are calculated as follows:Initial Investment = Call price received for higher exercise price – Call price paid for lower exercise price call = INR 15 – INR 48 = - INR 33 Table 1: Profit from a Bullish Money Spread Using Call OptionsStrike Price (INR) Long Call Value Short Call Value Value of theon 27th (INR) (INR) money spreadSeptember, 2012 S.P. = 1900 S.P. = 2000 (INR)Assumed1500 -48 15 -331600 -48 15 -331700 -48 15 -331800 -48 15 -331900 -48 15 -332000 52 15 672100 152 -85 672200 252 -185 672300 352 -285 67
Money Spread Using Call 400 300 200 100 Long Call Value Short Call Value (INR)Gain/Loss 0 Value of the money spread (INR) 1500 1600 1700 1800 1900 2000 2100 2200 2300 -100 -200 -300 -400 Stock Price Break- Even Point:Long call = INR 1900 + INR 48 = INR 1948Short call = INR 2000 + INR 15 = INR 2015
Break – Even point for money spread = INR 1933 This strategy will give maximum profit of INR 67 if strike price is greater than INR 1933 and will give maximum loss of INR 33 if strike price is less than 1933. This strategy will be adopted in Bullish market The implications of this strategy would be constant profit if both calls are in-the-money and constant loss if both calls are out-of-money.
STRADDLESA straddle strategy involves a put and a call option with the same exercise priceand same exercise date and on the same underlying security. There are two typesof straddles, a long straddle and a short straddle.A long straddle involves buying one call and one put on an underlying securitywith the same exercise price and the same exercise date.Here is an example of a Long Straddle strategy.Question:-TATA Motors share is selling for INR 245 on 8th September, 2012 and has a call aswell as put option on it with an exercise price of INR 250 and expiration date of27th September, 2012. The price of call is INR 6 and price of put is INR 8.What would be the gain or loss if investor enters into a long straddle usingoptions with the exercise date of September 27 and an exercise price of INR 250?
Answer: Table 2: Profit from the long straddle positionStock Price (INR) Gain from call Gain from Put Gain from the (INR) (INR) Straddle (INR)180 -6 62 56200 -6 42 36220 -6 22 16240 -6 2 -4250 -6 -8 -14260 4 -8 -4280 24 -8 16300 44 -8 36320 64 -8 56 Break- Even Point:Long call = INR 250 + INR 6 = INR 256Long put = INR 250 - INR 8 = INR 242
70 Chart Title 60 50 40 30 Gain from call (INR)Gain/Loss Gain from Put (INR) 20 Gain from the Straddle (INR) 10 0 180 200 220 240 250 260 280 300 320 -10 -20 Stock Price The investor with the long straddle will make a loss as long as the TATA Motors share price is within the range of INR 236 to INR 264. If the price is below INR 236 or above INR 264, this strategy will result in a profit. The more the price moves away from INR 236 or INR 264, the higher are the gains. A long straddle strategy is appropriate if an investor expects a large movement in the stock price but is not sure about the direction of the stock price or whether to invest in a bullish or bearish market.
STRANGLESA strangle involves the purchase of a put and a call with the same expiration datebut with the different exercise prices. The call exercise price is generally higherthan the put exercise price.Here is an example of a Long Strangle strategy.Question:-HUL stock is trading at INR 540 on 8th September, 2012. There is a call on HULshare with an exercise price of INR 560, selling for INR 4 and a put option with anexercise price of INR 520, selling for INR 3.What would be the gain or loss if investor enters into a strangle using optionswith exercise date of September 27 with exercise price of INR 560 and INR 520.
Answer: Table 3: Profit from the Strangle PositionStock Price (INR) Gain from the Gain from the Gain from the Long Call (INR) Long Put (INR) Strangle (INR) S.P. = 560 S.P. = 520400 -4 117 113440 -4 77 73480 -4 37 33520 -4 -3 -7560 -4 -3 -7600 36 -3 33640 76 -3 73680 116 -3 113 The table show that the strangle strategy will result in a maximum loss of INR 7 as long as the stock price is in the range of the two exercise prices. The investor will make a profit only if the stock price is below INR 513 or above INR 567.
Gain from a Strangle 140 120 100 80 Gain from the Long Call (INR)Gain / Loss 60 Gain from the Long Put (INR) Gain from the Strangle (INR) 40 20 0 400 440 480 520 560 600 640 680 -20 Stock price Break- Even Point:Long call = INR 560 + INR 4 = INR 564Long put = INR 520 - INR 3 = INR 517
A Strangle is similar to a straddle in the sense that the investor is not sure about the direction of the stock price or whether to invest in a bullish or bearish market.