PROFIT FROM A BOUGHT STRIP POSITION

Assume that a Reliance share is currently selling for INR 2,750 and has a call as well as a put option on it, with an exercise price of INR 2,800 and an expiry of 90 days. The price of the call is INR 50, and the price of the put is INR 100. What are the gain from a bought strip when Stock price is 2600,2650,2700,2750,2800,2850,2900,2950,3000,3050,3100,3150,3200 Solution: The investor with a bought strip will make a loss as long as the stock price is in the range of INR 2,675(2800-250/2) where 2 puts would be exercised to INR 3,050(2800+250),where a call would be exercised They will make a profit if the stock price goes below INR 2,675 or above INR 3,050. Moreover the profit from a strip is larger when the price decreases below INR 2,650.Thus a bought strip is preferable when the probability of an increase in the downward movements of stock prices is higher. The strip buyer will also benefit if the stock price increase beyond INR 3,050.

PROFIT FROM A BOUGHT STRIP POSITION

STOCK PRICE(INR) GAIN FROM THE BOUGHT CALL (INR) GAIN FROM THE TWO BOUGHT PUTS(INR) GAIN FROM THE STRIP(INR)

2600 2650 2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200

-50 -50 -50 -50 -50 0 50 100 150 200 250 300 350

200 100 0 -100 200 -200 -200 -200 -200 -200 -200 -200 -200

150 50 -50 -150 -250 -200 -150 -100 -50 0 50 100 150

PROFIT FROM A WRITTEN STRIP POSTION

Assume that a Reliance share is selling is for INR,2750 and its has a call as well as put option on it, with an exercise price of INR,2800 and an expiry of 90 days. The price of the call is INR 50, and the price of the put is INR 100. Find the profit the written strip when Stock price is 2600,2650,2700,2750,2800,2850,2900,2950,3000,3050,3100,3150, 3200 Solution: A written strip results in a profit when the stock price is in the range of INR 2675 to INR 3050. Thus a written strip strategy is preferable when the stock price is expected to be steady and not likely to move in either direction and when the movement , if any, is expected to be upwards, rather than downwards.

PROFIT FROM A WRITTEN STRIP POSTION

STOCK PRICE(INR) GAIN FROM GAIN FROM THE WRITTEN THE TWO CALL (INR) BOUGHT PUTS(INR) 50 50 50 -50 -100 -200 0 200 200 200 GAIN FROM THE STRIP(INR) -150 50 250 150 100

2600 2700 2800 2900 2950

3000
3050 3100 3150 3200

-150
-200 -250 -300 -350

200
200 200 200 200

50
0 -50 -100 -150

PROFIT FROM A BOUGHT STRAP POSITION

Assume that a Reliance share is currently selling for INR 2750 and it has a call as well as a put option on it with an exercise price of INR 2800 and an expiry of 90 days. The price of the call is INR 50 and the price of the put is INR100. Show the profit from this bought strap strategy when stock prices are 2400,2500,2600,2700,2800,2900 and 3000 respectively. In a bought strap strategy the investor will make a profit as long as the stock price is above INR 2900(2800+50*2) or below INR 2600(2800-200), they will make losses if the stock price is within the range of INR 2600 to INR 2900 Thus a bought strap is more beneficial if the price are expected to have substantial upward movement.

PROFIT FROM A BOUGHT STRAP POSITION

STOCK PRICE (INR) GAIN FROM THE GAIN FROM TWO BOUGHT BOUGHT PUT CALLS(INR) (INR) -100 -100 -100 -100 -100 100 300 200 100 0 -100 -100 GAIN FROM THE STRAP(INR)

2400 2500 2600 2700 2800 2900

200 100 0 -100 -200 0

3000

300

-100

200

PROFIT FROM A WRITTEN STRAP POSITION

Assume that a Reliance share is currently selling for INR 2750 and it has a call as well as a put option on it with an exercise price of INR 2800 and an expiry of 90 days. The price of the call is INR 50 and the price of the put is INR100. Show the profit from this written strap strategy when stock prices are 2400,2500,2600,2700,2800,2900 and 3000 respectively This position will result in profits the stock price is in the range of INR 2600 and INR 2900. If the stock price increases beyond INR 2900 this strategy will result in the substantial losses. Thus a written strap is advantageous when the stock price is likely to remain in the close range of the exercise price and the chances of is going down slightly more than the chances of it going up

PROFIT FROM A WRITTEN STRAP POSITION STOCK GAIN FROM PRICE (INR) THE TWO SOLD CALLS(INR) 2400 100 GAIN FROM SOLD PUT (INR) GAIN FROM THE STRAP(INR)

-400+100=-300

-200

2500 2600
2700 2800 2900 3000

100 100
100 100 -200+100=-100 -400+100=-300

-300+100=-200 -200+100=-100
100-100=0 100 100 100

-100 0
100 200 0 -200

Strangles
Bottom vertical combination (buys a put and a call with same expiration date and different strikes) The call strike ,K2 is higher than put strike price, K1 The profit pattern depends on how close together strike prices are. Larger the distance less downside risk and farther the stock price has to move. Downside risk less than straddle Top vertical combination (sale of a strangle) Range of stock price ST<=K1 K1<ST<K2 ST>=K2 Payoff from Payoff from Total payoff call put 0 K1-ST K1-ST 0 0 0 ST-K2 0 ST-K2

A Strangle Combination

Profit K1 K2 ST

Question
A stock is currently valued at $69 by the market.It is expected to move significantly in next three months.A call costs $4 and the put costs $3.An investor buys both call and put with strike price of $70 Identify the strategy and net profit / loss to the investor if stock price is a) $69 b) $70 c) $90 d) $55