The document discusses various options strategies including money spreads, straddles, and strangles. It provides examples of each strategy using hypothetical stocks and options prices. For money spreads, it shows how an investor can construct a bullish spread by buying a lower strike call and writing a higher strike call. For straddles and strangles, it gives examples of long positions involving both a put and call with the same expiration date but different strike prices. The examples calculate the potential profits and losses from these strategies under different stock price scenarios.

1. A
Group Project
Of
Futures & Options
On
Advance Options Strategies
Submitted to: Dr. SampadaKapse
Submitted by:
ChandanPahelwani – 11047
NikunjGajara – 11046
NeerajParihar - 11052
Atirek Sharma – 11074
YashwantVaishnav– 11093

2. MONEY SPREAD (Vertical Spread)
USING CALLS
Money Spread refers to a portfolio that contains same type of option with the
same expiration date but different exercise prices. A money spread has two
forms, bullish and bearish.
In bullish money spread investor:
 buy call at lower price
 write call at higher price
In bearish money spread investor:
 buy call at higher price
 write call at lower price
Here 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 available
with maturity date on 27th September, 2012 with different exercise prices. The
price of 1st call option with an exercise price of INR 2000 is INR 15 and price of 2nd
call option with an exercise price of INR 1900 is INR 48. What would be the gains
and losses if you enter into bullish money spread using calls?

3. Answer:
Initial investment and the value of the bullish money spread on the expiration
date 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 Options
Strike Price (INR) Long Call Value Short Call Value Value of the
on 27th (INR) (INR) money spread
September, 2012 S.P. = 1900 S.P. = 2000 (INR)
Assumed
1500 -48 15 -33
1600 -48 15 -33
1700 -48 15 -33
1800 -48 15 -33
1900 -48 15 -33
2000 52 15 67
2100 152 -85 67
2200 252 -185 67
2300 352 -285 67

4. 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 1948
Short call = INR 2000 + INR 15
= INR 2015

5.  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.

6. STRADDLES
A straddle strategy involves a put and a call option with the same exercise price
and same exercise date and on the same underlying security. There are two types
of straddles, a long straddle and a short straddle.
A long straddle involves buying one call and one put on an underlying security
with 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 as
well as put option on it with an exercise price of INR 250 and expiration date of
27th 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 using
options with the exercise date of September 27 and an exercise price of INR 250?

7. Answer:
Table 2: Profit from the long straddle position
Stock Price (INR) Gain from call Gain from Put Gain from the
(INR) (INR) Straddle (INR)
180 -6 62 56
200 -6 42 36
220 -6 22 16
240 -6 2 -4
250 -6 -8 -14
260 4 -8 -4
280 24 -8 16
300 44 -8 36
320 64 -8 56
 Break- Even Point:
Long call = INR 250 + INR 6
= INR 256
Long put = INR 250 - INR 8
= INR 242

8. 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.

9. STRANGLES
A strangle involves the purchase of a put and a call with the same expiration date
but with the different exercise prices. The call exercise price is generally higher
than 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 HUL
share with an exercise price of INR 560, selling for INR 4 and a put option with an
exercise price of INR 520, selling for INR 3.
What would be the gain or loss if investor enters into a strangle using options
with exercise date of September 27 with exercise price of INR 560 and INR 520.

10. Answer:
Table 3: Profit from the Strangle Position
Stock Price (INR) Gain from the Gain from the Gain from the
Long Call (INR) Long Put (INR) Strangle (INR)
S.P. = 560 S.P. = 520
400 -4 117 113
440 -4 77 73
480 -4 37 33
520 -4 -3 -7
560 -4 -3 -7
600 36 -3 33
640 76 -3 73
680 116 -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.

11. 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 564
Long put = INR 520 - INR 3
= INR 517

12.  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.