15-1 options strategies
1 introduction
2 position
equivalencies
3 covered calls and protective puts
4 spreads and combinations
5 implied volatility
and volatility skew
6 investment objectives and strategy selection
7 uses of options in portfolio management
systhetic
forward
position
synthetic put and call
derivatives
financial instruments through which counterparties agree to exchange economic cash flows based on the movement of underlying securities, indexes,currencies or other instruments or factors
value is derived from the economic performance of the underlying
exchange-traded not match counterparties' specific needs but mitigate counterparty risk
options
contingent-claim derivate
nonlinear payoffs - benefit from movements in the underlying in one direction without being hurt in opposite direction
the cost - the upfront cash payment required to enter position
to modify investment positions
to implement investment strategies
to infer market expectations
for hedging risk exposures
for seeking to profit from anticipated market moves
for implementing desired risk exposures cost-effective
to transform the payoff profile of their positons
when market views change
put-call parity: the equivalence of
a put + the underlying and a call + a risk-free bond
S_0 + p_0 = c_0 + X/((1 + r)^T)
put-call-forward parity:the equivalence of
(F_0(T)) / ((1 + r)^T) + p_0 = c_0 + X / ((1 + r)^T)
synthetic long
forward positon
motivation
to exploit an arbitrage opportunity presented by the actual forward price
the need for an alternative to the outright purchase of a long forward position
synthetic short
forward position:
short a call + long a put
a long call + a short put
with identical strike price and expiration
traded at the same time on the same underlying
at the same strike price and maturity
early assignment risk with american-style options
the same outcome - short forwards or futures
used to eliminate future price risk - pay risk-free rate
protective put strategy
long stock：a long call + a long put
eliminates the downside risk leave the profit potential unlimited
the symmetrical payoffs of long and short stock,forward and futures positions can altered by implementing synthetic options positions
implied volatility: outlook of future volatility of underlying
derived from an option pricing model =
model price - market price
OTM puts typically command higher implied volatilities than ATM OR OTM calls
realized volatility: square root of realized variance of returns
σ_Annual(%) = σ_Monthly(%) * √(252/21)
assum average trading days in year and month are 252 and 21
persistent volatility
skew and in some
circumstances
volatility smile
the implied volatility dependent on strike prices
the extent of skew depends on several factors:
investor sentiment - turning bearish: increase skew + surge implied volatility
the relative supply/demand - imbalance: imlied volatility higher for puts with strike price below underlying price
the level of skew varies over time
profit from implied volatility skew
-long risk reversal: long calls and short put -delta hedged by selling underlying
the term structure of volatility: different maturities display different implied volatilities
often contango - implied volatility higher for longer-term than for near-term
invert - stress markets and de-risking sentiment prevails
the implied volatility surface: three-dimensional plot
days to expiration / strike prices / implied volatilites
simultaneously show the volatility skew(smile) and term structure of implied volatility