Upload
rohanharsh
View
220
Download
0
Embed Size (px)
Citation preview
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 1/35
DERIVATIVES
OPTIONS
KAUSHIK DESARKAR
MBA
GOA INSTITUTE OF MANAGEMENT
1
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 2/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
EUROPEAN OPTIONS
•Topics
•Option Strategies
2
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 3/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•OPTION STRATEGIES
•BASIC STRATEGIES
• SPREADS
•COMBINATIONS
•BASIC STRATEGIES – The Option and the Underlying
• SPREADS – Options of the same class – either Calls or Puts
•COMBINATIONS – Using both Call and Put Options
3
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 4/35
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 5/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COVERED CALL – OUTCOMES
•Note the Profit Profile – What is another position that could generate such a profile ?
•Answer : Short Put (remember the Put‐Call Parity)
• SHORT CALL + LONG STOCK = COVERED CALL (SHORT PUT)
5
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 6/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•BASIC STRATEGIES
• PROTECTIVE PUT
• Position involves buying a Put when buying the underlying Asset.
• The purchase
of
the
Put
Option
serves
as
a Protection.
• The idea behind buying a Put is to minimise the downside risk if the value of the
underlying falls below a (pre)specified limit.
•Usually the Put Option purchased is close to ATM or OTM.
• The ITM
Put
Options
will
be
expensive
so
preference
for
the
above.
•Outcomes in the next slide
6
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 7/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• PROTECTIVE PUT ‐ OUTCOMES
•Note the Profit Profile – What is another position that could generate such a profile ?
•Answer : Long Call (remember the Put‐Call Parity)
•Used by Investment Managers to protect a Long Portfolio.
• LONG PUT + LONG STOCK = PROTECTIVE PUT (LONG CALL)
7
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 8/35
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 9/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SPREADS
• BULL SPREAD
• Can be created using 2 Call Options or 2 Put Options.
• A Long Bull Spread is created by going Long on the Lower Strike Price Option and going Short on the Higher Strike Price Option.
• The idea of going Short on the Higher Strike Price Option is to defray the costs of the LowerStrike Price Option assuming you are using Call Options
• Naturally, the Upside Potential is surrendered while the downside Risk is minimised.
• Very Important:
• If Long Bull Spread is created using Calls – there will be a initial cash outflow.
• If Long Bull Spread is created using Puts – there will be a initial cash inflow.
• 3 Situations
•
Both Calls are OTM – Aggressive Bull Spread• 1 Call is OTM & 1 is ITM – Less Aggressive
• Both are ITM ‐ Conservative
9
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 10/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•BULL SPREAD ‐ OUTCOMES
10
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 11/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SPREADS
• BEAR SPREAD
• Can be created using 2 Call Options or 2 Put Options.
• A Long Bear Spread is created by going Long on the Higher Strike Price Option and going Shorton the Lower Strike Price Option.
• The idea of going Short on the Lower Strike Price Option is to defray the costs of the HigherStrike Price Option – assuming you are using a Put Option.
• Naturally, the Upside Potential is surrendered while the downside Risk is minimised.
• Very Important:
• If Long Bear Spread is created using Calls – there will be a initial cash inflow.
• If Long Bear Spread is created using Puts – there will be a initial cash outflow.
• 3 Situations
•
Both Puts are OTM – Aggressive Bear Spread• 1 Put is OTM & 1 is ITM – Less Aggressive
• Both are ITM ‐ Conservative
11
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 12/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•BEAR SPREAD ‐ OUTCOMES
12
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 13/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT 13
• SPREADS
• BOX SPREAD
• 1 Box Spread = 1 Bull Spread + 1 Bear Spread
• The Bull Spread is created using Call Options
• The Bear Spread is created using Put Options
• The 2 Strike Prices (K1) and (K2) are the same for the Calls and the Put Options
• The Box Spread is only valid if you are using European Options.
• Outcomes using American Options – refer to JCH (7 th ed.) Business Snapshot 10.1
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 14/35
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 15/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•BUTTERFLY ‐ OUTCOMES
15
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 16/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SPREADS
•CONDOR SPREAD
•A Condor Spread is created using Options with 4 Different Strike Prices.
• There are usually 2 Long Positions and 2 Short Positions.
• The Long Positions are as follows
• 1 Option with a relatively low Strike Price
• 1 Option with a relatively High Strike Price
•
The Short Positions are created as follows• 2 Options with the 2 Strike Prices – close to the midway between the Strikes of the Long Options
• It is a profitable strategy if the final price stays (very) close to the Short Position Strikeprice.
•Appropriate if investor is speculating that large stock price movements are (highly)unlikely.
16
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 17/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•CONDORS ‐ OUTCOMES
17
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 18/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SPREADS
•Calendar Spreads
•All the Spreads we have considered till now were having the same Expiry Date.
• In a Calendar Spread, 2 Options are used – both have the same Strike Price but different
expiration Dates.
•Calendar Spread = Short Call Option + Long Call Option with longer maturity
• From above it is clear that an initial investment is required.
•PLEASE READ CHAP 10 FROM JCH (7TH ED) AS THIS SECTION IS A SURE EXAM SECTION.
18
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 19/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SPREADS
• The different types of Spreads that can be created :
19
Time to expiry Same Time to expiry Different
Strike Price is Same XXX Calendar Spreads
Strike Price is Different Bull Spread, Bear Spread, Box
Spreads, Condors
and
Butterflies
Diagonal Spreads
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 20/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
•A Combination is an Option Trading Strategy involving taking positions in both Calls and
Puts on the same underlying Asset.
•
Popular
Combinations
include
:
• Straddle
• Strip
•Strap
• Strangles
•Range Forward Contracts
20
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 21/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
• Straddle
• 1 Long(Short) Straddle = 1 Long(Short) Call + 1 Long(Short) Put
•Appropriate strategy when you are speculating a large movement of the underlyingassets price but are not sure of the direction.
•Usually large movements are due to M&A activity, lawsuits etc.
•The money
‐making opportunity is YOU have to recognise this potential jump/volatility
before the market prices the same in its options.
• The Strike Price as well as the Time to Expiration are the same.
•
The outcomes are ….
21
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 22/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• LONG STRADDLE ‐ OUTCOME
•Good strategy IF you and the market are expecting (very) high volatility at expiry.
22
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 23/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• SHORT STRADDLE ‐ OUTCOMES
•Good strategy IF you and the market are expecting (very) low volatility at expiry.
23
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 24/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
• Strip
• 1 Long(Short) Strip = 1 Long(Short) Call + 2 Long(Short) Put
•Appropriate strategy when you are speculating a large movement of the underlyingassets price but are not sure of the direction – however you have an inkling that there isa higher possibility of decline than that of a rise.
• The money‐making opportunity is YOU have to recognise this potential jump/volatilitybefore the market prices the same in its options. (Contrarian Strategy)
•Both the Strike Price and the Time to expiration are same.
• The outcomes are ….
24
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 25/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• STRIP ‐ OUTCOMES
• Strip = 2 Puts + 1 Call – Notice the Profit Profile on the left.
25
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 26/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
• Strap
• 1 Long(Short) Strap = 2 Long(Short) Calls + 1 Long(Short) Put
•Appropriate strategy when you are speculating a large movement of the underlyingassets price but are not sure of the direction – however you have an inkling that there isa higher possibility of a rise than that of a decline.
• The money‐making opportunity is YOU have to recognise this potential jump/volatilitybefore the market prices the same in its options.
• The outcomes are ….
26
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 27/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• STRIP ‐ OUTCOMES
• Strap = Put + 2 Calls – Notice the Profit Profile on the right.
27
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 28/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
• Strangle
• 1 Long(Short) Strangle = 1 Long(Short) Call + 1 Long(Short) Put
• Strike Price
of
Call
> Strike
Price
of
Put
• Time to Expiration is the same.
•Appropriate strategy when you are speculating a large movement of the underlying
assets price but are not sure of the direction.•Usually profitable if shorted and the volatility remains within a range whereby both
options expire OTM.
•
The outcomes are ….
28
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 29/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• STRANGLE ‐ OUTCOMES
• Strangle = 1 Put + 1 Call
•Call(Strike) > Put (Strike)
29
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 30/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
•Range Forward Contracts
•Range Forward Contracts are created by taking a position in the call option and oppositeposition in the put option.
• The basic idea is to nullify the cost incurred in purchasing options.
• Favourite with Corporates since ZERO Cost incurred in buying options.
•RISK (Let us understand through a small case)
•A treasurer wants to buy a 30‐day Call on US$, the Strike Rate being Rs.56.00. Currentspot is Rs. 55.00. The Call is valued at Re. 1/‐ per USD 1.
• The underlying notional amount is US$ 2 Million.
•
Let us assume 1 Call buys USD1.• Total Call Premium = 1 X 2 mn = Rs. 2 mn.
30
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 31/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT 31
Consider the 2 cases – the treasurer buys a simple call and in the second case
The treasurer goes Long Call and Short Put to defray the cost of the call.
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 32/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
• The Loss Profile
• The treasurer tried to contain the cash outflow due to purchase of Call option byshorting a Put..
•
However, he
is
now
speculating that
the
US$
will
remain
strong
against
the
Indian
Re.
•But aren’t treasurers paid not to speculate ???
32
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 33/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•COMBINATIONS
•Range Forward Contracts
•Range Forward Contracts are created by taking a position in the call option and oppositeposition in the put option.
• Usually to minimise the lower‐side risk, there is a gap between the Strike of the Call and
the Strike of the Put.
•Returning back to the same example but now the Bank offers a Long Call, Strike = 56 and
premium = 0.85
as
well
as
a Short
Put,
Strike
= 54
and
premium
= 0.45.
• The situation is in the next slide…
33
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 34/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT 34
7/27/2019 Derivatives - Session 12
http://slidepdf.com/reader/full/derivatives-session-12 35/35
DERIVATIVES– KAUSHIKDESARKAR,GOAINSTITUTEOFMANAGEMENT
•CASE
• PINE STREET CAPITAL
•QUESTIONS:
•What
is
a Hedge
Fund?
•What is the strategy adopted by Pine Street Capital? Describe the Strategy.
•Why is the Hedge Fund exploring Put Options? Discuss in‐depth.
• FURTHER DISCUSSIONS ON MONDAY
• THANK YOU
35