Chapter 3

Chapter 3
Insurance, Collars, and Other Strategies
Basic Insurance Strategies

Options can be
Used to insure long positions (floors) Used to insure short positions (caps) Written against asset positions (selling insurance)
2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved.
3-2
Insuring a Long Position: Floors

A put option is combined with a position in the underlying asset Goal: to insure against a fall in the price of the underlying asset Example: Buying a 1000- strike put with 6 months to expiration, in conjunction with holding an index position with a current value of $1,000. 1000-strike price put option has a value of $74.201. Risk free rate is 2% for 6 months.
2013 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved. 3-3
Insuring a Long Position: Floors
Payoff at expiration S&R Index S&R Put Payoff 900 100 1000 950 50 1000 1000 0 1000 1050 0 1050 1100 0 1100 1150 0 1150 1200 0 1200 (Cost + Interest) Profit -1095.68 -95.68 -1095.68 -95.68 -1095.68 -95.68 -1095.68 -45.68 -1095.68 4.32 -1095.68 54.32 -1095.68 104.32
3-4
Insuring a Long Position: Floors (contd)

Example: S&R index and an S&R put option with a strike price of $1,000 together
Buying an asset and a put generates a position that looks like a call!
Insuring a Short Position: Caps

A call option is combined with a short position on the underlying asset When you short sell an asset, you need to buy back that asset to cover your position in the future. However, you will suffer a loss if the price increase. Goal: to insure against an increase in the price of the underlying asset (when one has a short position in that asset)
3-6

Given risk free- rate is 2% You short sell S&R index at $1,000. After 6 months, you need to buy back S&R index to cover your short position. You scare that S&R will increase in price after 6 months => you buy a call option with a strike price of 1000 at a premium of $93.809 to hedge this risk. Profit calculation for the combined position: Initially, you receive $1,000 from short sell S&R and pay $93.809 for call => Net cash inflow = 1000 93.809 . Afterward, you can use this money to invest this money at risk free rate to receive (1000 93.809) 1.02 = 924.32 after 6 months. If after six months, S&R index is 1000 => the payoff for your short position is -1000 => your profit = -1000 + 924.32 = 75.68.
3-8
Insuring a Short Position: Caps (contd)

Example: shortselling the S&R index and holding a S&R call option with a strike price of $1,000
An insured short position looks like a put!

Selling Insurance
For every insurance buyer there must be an insurance seller Strategies used to sell insurance
Covered call (can also be called option overwriting or covered writing) is writing an call option when there is a corresponding long position in the underlying asset is called covered writing Naked writing is writing an option when the writer does not have a position in the asset
3-10
Covered Writing: Covered Calls

If you own the S&R index and simultaneously sell a call option => you have written a covered call. For example, you buy the S&R index at the price of $1,000, risk- free rate is 2%.You also sell a call option with a strike price of $1,000 for a premium of $93.809. If the S&R price at expiration is $1,100. Calculate the profit for the combined position (covered call position) ? Profit = 1100 (1000 1.02) + (93.809 1.02) 100 = 75.68
3-11
3-12

Example: holding the S&R index and writing a S&R call option with a strike price of $1,000
Writing a covered call generates the same profit as selling a put!

Covered Writing: Covered Puts

Covered put = writing a put option + short
position on underlying asset. Example: You sell a put option on S&R index with a strike price of $1,000, the premium is $74.201. You scare that the S&R index will decrease below $1,000=> short a put option will suffer a loss. You short sell S&R index to be able have gain on this short position when index fall. The gain from short position will offset the loss from written put.
3-14
Covered Writing: Covered Puts

Example: shorting the S&R index and writing a S&R put option with a strike price of $1,000
Writing a covered put generates the same profit as writing a call!

Synthetic Forwards
A synthetic long forward contract
Buying a call and selling a put on the same underlying asset, with each option having the same strike price and time to expiration Example: buy the $1,000strike S&R call and sell the $1,000-strike S&R put, each with 6 months to expiration. Call premium :93.81 Put premium: 74.2.
3-16
Synthetic Forwards (contd)

(Long call + short put) at the same strike price of $1,000 will create the same position of long forward with strike price of $1,020. This means that both positions will produce the same profit. Differences between a synthetic long forward contract and the actual forward The forward contract has a zero premium, while the synthetic forward requires that we pay the net option premium With the forward contract, we pay the forward price, while with the synthetic forward we pay the strike price
3-17
Put-Call Parity
The net cost of buying the index using options must equal the net cost of buying the index using a forward contract Call (K, t) Put (K, t) = PV (F0,t K)
Call (K, t) and Put (K, t) denote the premiums of options with strike price K and time t until expiration, and PV (F0,t ) is the present value of the forward price
This is one of the most important relationships in derivatives!

Put-Call Parity
Example: Consider buying the 6-month 1000- strike S&R call for a premium of $93.809 and selling the 6-month 1000-strike put for a premium $74.201. These transactions create a synthetic forward permitting us to buy the index in 6 months for $1,000.Because the actual forward price is $1020, this synthetic forward permits us to buy the index at a bargain of $20, the present value of which is $20/1.02 = $19.61. The difference is option premium is also $19.61.This result in exactly what the put-call parity equation state: $93.809
3-19
Spreads and Collars

An option spread is a position consisting of only calls or only puts, in which some options are purchased and some written Examples: bull spread, bear spread, box spread A collar is the purchase of a put option and the sale of a call option with a higher strike price, with both options having the same underlying asset and having the same expiration date Collar = long put + short call with higher strike price. Example: zero-cost collar
Spreads
A bull spread is a position, in which you buy a call and sell an otherwise identical call with a higher strike price
It is a bet that the price of the underlying asset will increase Bull spreads can also be constructed using puts
3-21
Spreads (contd)
A bear spread is a position in which one sells a call and buys an otherwise identical call with a higher strike price A box spread is accomplished by using options to create a synthetic long forward at one price and a synthetic short forward at a different price
A box spread is a means of borrowing or lending money: It has no stock price risk
A ratio spread is constructed by buying m calls at one strike and selling n calls at a different strike, with all options having the same time to maturity and same underlying asset
Ratio spreads can also be constructed using puts
Collars
A collar represents a bet that the price of the underlying asset will decrease and resembles a short forward A zero-cost collar can be created when the premiums of the call and put exactly offset one another
3-23
Summary
Collar = long put + short call at higher strike price. Expectation => investor expects price will decrease. Bull spread = long call + short call at a higher strike price. Expectation => investor expects price will increase. Bear spread = short call + long call at a higher strike price. Expectation => investor expects price will decrease. Box spread = ( synthetic long forward by calls at one price) + (synthetic short forward by calls at different price) Motivation => a means for borrowing or lending money. Ratio spread = Buying m calls at one strike + selling n calls at different strike. Motivation => create a spread with zero premium. Remember => all options have: same time to maturity + same underlying asset. Remember: the general motivation of all spread is that the initial premium is reduced.
Speculating on Volatility
Options can be used to create positions that are nondirectional with respect to the underlying asset Examples
Straddles Strangles Butterfly spreads
Who would use nondirectional positions?

Investors who do not care whether the stock goes up or down, but only how much it moves, i.e., who speculate on volatility
3-25
Straddles
Buying a call and a put with the same strike price and time to expiration
A straddle is a bet that volatility will be high relative to the markets assessment
Strangles
Buying an out-ofthe-money call and put with the same time to expiration
A strangle can be used to reduce the high premium cost, associated with a straddle
Written Straddles
Selling a call and put with the same strike price and time to maturity
Unlike a purchased straddle, a written straddle is a bet that volatility will be low relative to the markets assessment
Butterfly Spreads
Write a straddle + add a strangle = insured written straddle
A butterfly spread insures against large losses on a straddle
3-29
Asymmetric Butterfly Spreads
3-30
Summary of Various Strategies

Different positions, same outcome
Strategies driven by the view of the markets direction
3-31
3-32
3-33
3-34
3-35
3-36
3-37
3-38
3-39
3-40
3-41

Chapter 3 - Insurance, Collars and Other Strategies

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Chapter 3 - Insurance, Collars and Other Strategies

Diunggah oleh

Hak Cipta:

Format Tersedia

Insurance, Collars, and Other Strategies

Basic Insurance Strategies

Insuring a Long Position: Floors

Insuring a Long Position: Floors

Insuring a Long Position: Floors (contd)

Insuring a Short Position: Caps

Insuring a Short Position: Caps

Insuring a Short Position: Caps

Insuring a Short Position: Caps (contd)

An insured short position looks like a put!

Covered Writing: Covered Calls

Covered Writing: Covered Calls

Covered Writing: Covered Calls

Writing a covered call generates the same profit as selling a put!

Covered Writing: Covered Puts

Covered Writing: Covered Puts

Writing a covered put generates the same profit as writing a call!

Synthetic Forwards (contd)

This is one of the most important relationships in derivatives!

Spreads and Collars

Who would use nondirectional positions?

A butterfly spread insures against large losses on a straddle

Asymmetric Butterfly Spreads

Summary of Various Strategies

Strategies driven by the view of the markets direction

Anda mungkin juga menyukai