STRATEGIES

CONTINUED &
SUMMARY
 SESSION OBJECTIVES

o By the end of session you will be able to understand:

o Strip

o Strap

o Summarize all strategies with positions and actions

1
STRIP

￮ It is an extension of straddle
￮ A strip buyer expects the market to move significantly in negative
direction, but is unsure of the direction
￮ Hence, he takes an extra position (buying a put option)
Position
Leg 1 Buy a straddle (buy one call + buy one put)
Leg 2 Buy an additional put option
Example
Leg 1 Buy a straddle (Buy a call at Rs.100 premium Rs.5 + buy a put at Rs.100
with premium Rs.5)
Leg 2 Buy a additional put option at Rs.100 with premium Rs.5 (bearish view)
Net premium Rs.15 (-5 +5 +5)
 profit / loss profit / loss buy Total Profit /
X is price Net premium
on buy a call of TWO put loss on the
at expiry paid for strip
of Rs.100 option @ Rs.100 strip
A B C A+B+C
75 -15 0 50 35
80 -15 0 40 25
85 -15 0 30 15
90 -15 0 20 5
92.5 -15 0 15 0
95 -15 0 10 -5
100 -15 0 0 -15
105 -15 5 0 -10
110 -15 10 0 -5
115 -15 15 0 0
120 -15 20 0 5
125 -15 25 0 10
Particulars Formula Calculations
Maximum
Unlimited
profit
Maximum
Net premium Rs. -15
Loss
Break even Strike price – (net premium / 100 – (15 / 2) =
price 1+number of additional position) 92.50
Strike price + net premium 100 + 15 = 115
Expects the market to move
significantly in negative direction, but
View is unsure of the direction
Hence, he takes an extra position
(buying a put option)
PAY-OFF OF A STRIP BUYER

No profit
zone

Break even
points

Rs.92.50 Rs.11
5

Maximum
Loss Rs.-15
Rs.100
STRAP

￮ It is an extension of straddle
￮ A strip buyer expects the market to move significantly in positive
direction, but is unsure of the direction
￮ Hence, he takes an extra position (buying a call option)
Position
Leg 1 Buy a straddle (buy one call + buy one put)
Leg 2 Buy a additional call option

Example
Leg 1 Buy a straddle (Buy a call at Rs.100 premium Rs.5 + buy a put at Rs.100
with premium Rs.5)
Leg 2 Buy a additional call option at Rs.100 with premium Rs.5 (bullish view)
Net premium Rs.15 (-5 +5 +5)
 profit / loss profit / loss buy Total Profit /
X is price Net premium
on buy a put of TWO call loss on the
at expiry paid for strip
of Rs.100 option @ Rs.100 strip
A B C A+B+C
75 -15 25 0 10
80 -15 20 0 5
85 -15 15 0 0
90 -15 10 0 -5
95 -15 5 0 -10
100 -15 0 0 -15
105 -15 0 10 -5
107.5 -15 0 15 0
110 -15 0 20 5
115 -15 0 30 15
120 -15 0 40 25
125 -15 0 50 35
Particulars Formula Calculations
Maximum
unlimited
profit
Maximum
Net premium Rs.-15
Loss
Break even Strike price + (net premium /
100 + (15 / 2) = 107.5
price 1+number of additional position)
Strike price - net premium 100 -15 = 85
Expects the market to move
significantly in positive direction,
View but is unsure of the direction
Hence, he takes an extra position
(buying a call option)
PAY-OFF OF A STRAP BUYER
SUMMARY – RISING PRICES
Potential profit
Strategy Construction Market Outlook
and/or loss
Profit is unlimited as
Buy futures prices rise
Strongly bullish
Long futures
price expectation
Long call + Short put Risk is unlimited as
prices decline
Profit is unlimited on
Buy call
the upside
Bullish price
Long call
Long futures + long put expectation
Risk is limited to the
premium paid

Long call A+ Short call B

(Vertical call spread) Profit is limited
Mildly bullish price
Bull spread
expectation
Long put A + Short put B Risk is limited
(Vertical put spread)
wherein, Strike A < Strike B
SUMMARY – RISING PRICES
Market Potential profit
Strategy Construction
Outlook and/or loss
Neutral to Profit is limited
Short put
mildly bullish to the premium
Short put
price received.
Long futures + short call
expectation Risk is unlimited
Neutral to Profit is limited
Covered Long futures + short mildly bullish to the premium
call OTM call price received.
expectation Risk is unlimited

Long futures + Short call Mildly bullish

Profit is limited
Collar A+ Long put B wherein price
Risk is limited
Strike A > Strike B expectation
SUMMARY – DECLINING PRICES
Potential profit
Strategy Construction Market Outlook
and/or loss
Profit is unlimited as
Sell futures prices fall
Short Strongly bearish
futures price expectation
Long put + short call Risk is unlimited as
prices rise
Profit is unlimited as
Buy put prices fall
Bearish price
Long put
expectation
Short futures + long call Risk is limited as
prices rise
Short call A + long call B (vertical
Profit is limited if
call spread)
prices fall
Bear Mildly bearish
spread Short put A + long put B (vertical price expectation
Risk is limited if prices
put spread) wherein, Strike A <
rise
Strike B
SUMMARY – DECLINING PRICES
Potential profit
Strategy Construction Market Outlook
and/or loss
Profit is limited to
Neutral to
Sell call the premium
mildly bearish
Short call
price
Short futures + short put Risk is received
expectation
unlimited
Profit is limited to
Neutral to
the premium
Covered Short futures + OTM Short mildly bearish
put put price
Risk is received
expectation
unlimited
Short futures + short put A + Mildly bearish
Profit is limited
Reverse long call B price
collar expectation
Risk is limited
wherein Strike A < strike B
SUMMARY – STABLE PRICES
Strategy Construction Market Outlook Potential profit and/or loss

Profit is limited to the net

Stable price expectations.
premium received
Short Short call and short put
The trader expects that price
straddle at the same strike price Risk is unlimited,
will not move significantly in
as prices move up or down
either direction
beyond the two strike prices

Stable price expectations. Profit is limited to the

premium received
Short Short call and short put
The trader expects that prices
strangle at different strike prices
will not move in either Risk is unlimited if prices
direction significantly move sharply up or down
SUMMARY – STABLE PRICES
Potential profit and/or
Strategy Construction Market Outlook
loss
Stable price expectations. Profit is limited to the
net premium received
Short 1 call and 2
Short But, the trader expects
puts at the same
strip that probability of an up Risk is unlimited as
strike price
move is higher than that prices move up or down
of a down move significantly
Stable price expectation. Profit is limited to the
net premium received
Short 2 calls and 1
Short
put at the same strike But, the trader expects
strap
price that probability of a down Risk is unlimited as
move is higher than that prices move up or down
of an up move significantly
SUMMARY – STABLE PRICES
Potential profit and/or
Strategy Construction Market Outlook
loss
Long call A +
2 short calls B +
Long call C

Long put A + Stable price expectations. Profit is limited

2 short puts B +
Long put C
Butterfly
The trader expects that
spread
Long put A + prices will not move in Risk is limited even if
short put B + either direction prices moves sharply up
short call B + significantly or down
long call C

wherein
Strike A< Strike B < Strike C
SUMMARY – STABLE PRICES
Potential profit
Strategy Construction Market Outlook
and/or loss

Long Call A+
Short Call B +
Short Call C+
Long Call D

Long Put A+
Stable Price expectations. Profit is limited
Short Put B +
Short Put C +
The trader expects that
Condor Long Put D
prices will not move in Risk is limited even if
either direction price moves sharply
Long put A +
significantly up or down
Short Put B +
Short Call C+
Long Call D

Wherein Strike A< Strike B<

Strike C< Strike D
SUMMARY – UNCERTAIN PRICES

Strategy Construction Market Outlook Potential profit and/or loss

Uncertain price expectations. Profit is unlimited as prices

move up or down
Long Long call and Long put
The trader expects that price
straddle at the same strike price
will move significantly in Risk is limited,
either direction To the premium paid

Profit is unlimited as prices

Uncertain price expectations.
move up or down beyond
Long Long call and Long put the two strike prices
The trader expects that price
Strangle at different strike prices
will move significantly in
Risk is limited,
either direction
To the premium paid
SUMMARY – UNCERTAIN PRICES
Strateg Potential profit and/or
Construction Market Outlook
y loss
Uncertain price
Profit is unlimited as
expectations.
prices move up or
Buy1 call and 2 puts
Long down
at the same strike The trader expects that
strip
price probability of a down
Risk is limited,
move is higher than an
To the premium paid
up move
Uncertain price
expectations. Profit is unlimited as
prices move up or
Buy 2 calls and 1 put
Long down
at the same strike
strap The trader expects that
price
probability of a up move Risk is limited,
is higher than an down To the premium paid
move
THANK YOU