Options strategies

Returns using options

Put call parity

Synthetic forward position (Long)

  • long call, short put
  • hedge an existing short forward position
  • arb overprice forward
  • create a long forward

Synthetic forward position (short)

  • short call, long put
  • hedge long forward position
  • arb underpriced forward
  • create short forward

Synthetic put
P = C - S + PV(x)

Synthetic call
C= S + P -PV(x)

Covered call

  • long stock, short call (receive premium)

Objectives

  1. Yield enhancement (belief in limited upside)
  2. Position reductions
  3. Position exit at target price

Protective puts

  • Long stock, long put

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Objectives

  1. Protect against loss for period of time
  2. Higher strike, long the time, higher the cost

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Spreads & Combinations

Bull spread

  • buy low X call, sell higher X call
  • valuable when price rises

Bear spread

  • buy higher X, sell lower X
  • valuable when price falls

Straddle

  • long call and put at same X (long straddle)
  • expectation of large price movement

Collar

  • long stock + short call (higher X) + long put (lower X)
  • covered call + put/ protective put + short call
  • protect gains on position

Calendar spread

  • buy/sell of call/put (same X) but with different expiration dates
  • long calendar spread = sell near, buy long date
  • short calendar spread = buy near, sell long date
  • theta play -> near term option time value decays faster
  • neutral short term view, bull/bear long term

Volatility

Historical vol

  • derived from past return data of the underlying

Implied volatility

  • derived from option pricing model
  • IV of options of a given expiration are dependent on their strikes

Delta hedged risk reversal

  • long OTM call at higher X, short OTM put at low X