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Trading
Thursday, 02 April 2015 17:48

Trading

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Option Strategies:

SYNTHETIC LONG CALL:

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

BUY

USDINR

FUT

61.75

-

-

BUY

P.E.

OTM

61.75

61.50

0.1575

 

 APPLICATION:

Whenever we conservatively expect bullish trend but to protect the downside risk we hedge long future position by buying OTM put option. The maximum risk in this strategy is limited (to premium paid +difference between future price and OTM strike price). While profit potential is unlimited deducting the amount of premium paid once it crosses above the future buying level.

 SYNTHETIC LONG PUT:

ACTION

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

USDINR

FUT

61.75

-

-

BUY

C.E.

OTM

61.75

62.50

0.2850

 

 APPLICATION:

Whenever market expectations are conservatively bearish and to hedge a short position created in futures to limit upside risk, we buy OTM call option for the same. Maximum risk associated to it is limited (to premium paid + difference between strike price and spot price.). While downside profit potential is limited to spot price becoming nil minus the premium paid.

COVERED CALL:

ACTION

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

BUY

USDINR

FUT

61.75

-

-

SELL

C.E.

OTM

61.75

62.50

0.2850

Â

 APPLICATION:

This is often employed when the expectation from the market are neutral to moderately bullish. In this strategy we expect underlying not exceeding a particular level so accordingly we sell OTM call near the top level. For suppose we expect dollar to remain below 62.40 for the month of march, then we can sell 62.50 call option as shown in the example above. Maximum risk posing the strategy will be value of dollar becoming zero minus the premium received. While max profit will be difference between the strike price and spot price plus premium received

COVERED PUT:

ACTION

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

USDINR

FUT

61.75

-

-

SELL

P.E.

OTM

61.75

61.50

0.15

APPLICATION:

This strategy is employed when we expect market to react moderately bearish and we expect it not going below a particular range. For suppose in this case we expect dollar not to go below 61.50, so we can sell OTM put option of 61.50 with simultaneous selling position in futures @ 61.75. Maximum risk in this strategy will be unlimited pertaining to rise in price of dollar. While profit limitation will be difference between strike price and spot price plus premium received.

CALL BACK SPREAD STRATEGY

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

CALL

ITM

61.75

61

1.1525

BUY

CALL

OTM

61.75

62.50

0.2525

BUY

CALL

OTM

61.75

62.50

0.2525

 Application: - When trader expects Bullish trend and thinks that the underlying stock will experience significant upside movement in the near term.

Risk: - Limited risk

Reward: - Unlimited

PUT BACK SPREAD STRATEGY

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

Put

ITM

61.75

62.50

0.62

BUY

Put

OTM

61.75

61

0.0575

BUY

Put

OTM

61.75

61

0.0575

 

 Application: - When trader expects Bearish trend and thinks that the underlying stock will experience significant downside movement in the near term.

Risk: - Limited risk

Reward: - Unlimited

SHORT STRADDLE

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

Call

ATM

61.75

61.75

0.5025

SELL

Put

ATM

61.75

61.75

0.0875

 

 Application: - When trader expects that the underlying stock will experience little volatility in the near term.

 Risk: - Unlimited risk

 Reward: - Limited

SHORT STRANGLE

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

Call

OTM

61.75

63

0.1250

SELL

Put

OTM

61.75

61

0.0550


 

Application: - When trader expects that the underlying stock will experience little volatility in the near term.

 Risk: - Unlimited risk

 Reward: - Limited

CONDOR STRATEGY

TREND

OPTION TYPE

CONDITION

SPOT

EXERCISE/STRIKE

PREMIUM

SELL

Call

ITM

61.75

62

0.4525

BUY

Call

ITM

61.75

61

1.1925

SELL

Put

OTM

61.75

62

0.3250

BUY

put

OTM

61.75

61

0.0575

 

 Application: - When trader expects that the underlying stock will experience little volatility in the near term.

 Risk: - Limited risk

 Reward: - Limited

 

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