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A Group Project Of Futures & Options On Advance Options Strategies

Submitted to: Dr. Sampada Kapse

Submitted by: Chandan Pahelwani 11047 Nikunj Gajara 11046 Neeraj Parihar - 11052 Atirek Sharma 11074 Yashwant Vaishnav 11093

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?

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) on 27th September, 2012 Assumed 1500 1600 1700 1800 1900 2000 2100 2200 2300 -48 -48 -48 -48 -48 52 152 252 352 15 15 15 15 15 15 -85 -185 -285 -33 -33 -33 -33 -33 67 67 67 67 Long Call Value (INR) S.P. = 1900 Short Call Value (INR) S.P. = 2000 Value of the money spread (INR)

Money Spread Using Call


400 300 200 100 Gain/Loss 0 1500 1600 1700 1800 1900 2000 2100 2200 2300 -100 -200 -300 -400

Long Call Value Short Call Value (INR) Value of the money spread (INR)

Stock Price

Break- Even Point: Long call = INR 1900 + INR 48 = INR 1948 Short 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.

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?

Answer: Table 2: Profit from the long straddle position Stock Price (INR) Gain from call (INR) 180 200 220 240 250 260 280 300 320 -6 -6 -6 -6 -6 4 24 44 64 Gain from Put (INR) 62 42 22 2 -8 -8 -8 -8 -8 Gain from the Straddle (INR) 56 36 16 -4 -14 -4 16 36 56

Break- Even Point: Long call = INR 250 + INR 6 = INR 256 Long put = INR 250 - INR 8 = INR 242

70 60 50 40 30 Gain/Loss 20 10 0 180 -10 -20 200 220 240

Chart Title

Gain from call (INR) Gain from Put (INR) Gain from the Straddle (INR)

250

260

280

300

320

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.

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.

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

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 / Loss 60 40 20 0 400 -20 440 480 520 560 600 640 680

Gain from the Long Call (INR) Gain from the Long Put (INR) Gain from the Strangle (INR)

Stock price

Break- Even Point: Long call = INR 560 + INR 4 = INR 564 Long 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.

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