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Week 6 (chapter 12): Trading Strategies involving Options (Collar (a…
Week 6 (chapter 12): Trading Strategies involving Options
Option for hedging
Protective put = long stock + long put
Collar = long stock + long put + short call
Covered call = Long stock + Short call
Collar
a spread strategy imposes both a
floor
and a
ceiling
on the value of an existing investment
long put: buy a put with a strike price below spot price
short call: sell a call with a strike price above spot price
Zero cost collar
: premium received from a short call = premium paid for a long put
Spreads (all calls or all puts)
Vertical spreads: same maturity, different strikes
bear spreads
expect that the stock price will decrease
long put (up- front costs)
short call (large - unlimited losses possible)
butterfly spreads
bull spreads (expect that the stock price will increase)
long call (up- front costs)
short put (large losses possible)
call bull spreads
long a call at K1
short a call at K2
K2 > K1
Horizontal/ Calendar spreads: same strike, different maturities