Op ons Trading Strategies

Introduc on to Op ons

An op on is a contract wri en by a seller that conveys to the buyer the right but not the obliga on
to buy (in the case of a call op on) or sell (in the case of a put op on) an underlying asset at a
predetermined price (strike price) on or before a certain date (expira on date).

"An op on is a contract that gives the buyer the right, but not the obliga on, to buy or sell an
underlying asset at a predetermined price on or before a certain date."

Op on Terminology

 Call Op on: A contract that gives the buyer the right to buy an underlying asset at a
predetermined price.

 Put Op on: A contract that gives the buyer the right to sell an underlying asset at a
predetermined price.

 Strike Price: The predetermined price at which the buyer can buy or sell the underlying
asset.

 Expira on Date: The last day on which the op on can be exercised.

Op ons Payoffs

The payoff of an op on is the profit or loss that the buyer or seller of the op on receives at
expira on.

Payoff Profile of Buyer of Asset: Long Asset

Price of Underlying Asset

Below Strike Price

At Strike Price

Above Strike Price

Payoff Profile for Seller of Asset: Short Asset

Price of Underlying Asset

Below Strike Price

At Strike Price

Above Strike Price

Payoff Profile for Buyer of Call Op ons: Long Call

Price of Underlying Asset

Below Strike Price

At Strike Price

Above Strike Price

Payoff Profile for Writer (Seller) of Call Op ons: Short Call

Price of Underlying Asset

Below Strike Price

At Strike Price

Above Strike Price

Op ons Strategies

Op ons strategies are used to manage risk and maximize returns. Some common op ons strategies
include:

 Protec ve Put: Buying a put op on to protect against a poten al decline in the price of an
underlying asset.

 Covered Call: Selling a call op on to generate income from an underlying asset that is
already owned.

 Long Combo: Buying a call op on and selling a put op on to profit from a poten al increase
in the price of an underlying asset.

 Protec ve Call/Synthe c Long Put: Buying a call op on and selling a put op on to protect
against a poten al decline in the price of an underlying asset.

Strategy Descrip on

Protec ve Put Buy put op on to protect against decline

Covered Call Sell call op on to generate income

Long Combo Buy call op on and sell put op on

Protec ve Call/Synthe c Long Put Buy call op on and sell put op on

Vola lity
Vola lity is a measure of the uncertainty or risk of an underlying asset. It is an important factor in
op ons pricing.

Types of Vola lity

 Historical Vola lity: The standard devia on of the returns of an underlying asset over a
certain period of me.

 Implied Vola lity: The vola lity that is implied by the market price of an op on.

Calcula ng Historical Vola lity

Historical vola lity can be calculated using the following formula:

HV=∑i=1n(Ri−R¯)2n−1HV=n−1∑i=1n(Ri−R¯)2

Where:

 HVHV is the historical vola lity

 RiRi is the return of the underlying asset at me ii

 R¯R¯ is the average return of the underlying asset

 nn is the number of observa ons

Impact of Vola lity on Op ons

Vola lity has a significant impact on op ons pricing. An increase in vola lity will increase the price of
an op on, while a decrease in vola lity will decrease the price of an op on.## Op ons Fundamentals

Op on Terminology

 Index Op ons: Op ons that have an index as the underlying asset. In India, they have a
European style se lement. Examples include Ni y op ons and Mini Ni y op ons.

 Stock Op ons: Op ons on individual stocks. A stock op on contract gives the holder the
right to buy or sell the underlying shares at a specified price. They have an American style
se lement.

 Buyer of an Op on: The buyer of an op on is the one who pays the op on premium to buy
the right, but not the obliga on, to exercise the op on on the seller/writer.

 Writer/Seller of an Op on: The writer/seller of a call/put op on is the one who receives the
op on premium and is obligated to sell/buy the asset if the buyer exercises the op on.

Op on Types

Op on Type Defini on

Call Op on Gives the holder the right, but not the obliga on, to buy an asset by a certain date for a certain price.

Put Op on Gives the holder the right, but not the obliga on, to sell an asset by a certain date for a certain price.

Op on Pricing
  Op on Price/Premium: The price which the op on buyer pays to the op on seller. It is also
referred to as the op on premium.

 Expira on Date: The date specified in the op ons contract, also known as the exercise date,
strike date, or maturity.

 Strike Price: The price specified in the op ons contract, also known as the exercise price.

Op on Styles

 American Op ons: Op ons that can be exercised at any me up to the expira on date.

 European Op ons: Op ons that can be exercised only on the expira on date itself.

Op on Moneyness

Moneyness Defini on

In-the-Money (ITM) An op on that would lead to a posi ve cash flow to the holder if it were exercise

At-the-Money (ATM) An op on that would lead to zero cash flow if it were exercised immediately.

Out-of-the-Money (OTM) An op on that would lead to a nega ve cash flow if it were exercised immediate

Intrinsic Value and Time Value

The op on premium can be broken down into two components: intrinsic value and me value.

 Intrinsic Value: The amount the op on is ITM, if it is ITM. If the call is OTM, its intrinsic value
is zero.

 Time Value: The difference between the op on premium and its intrinsic value.

Op ons Payoffs

Payoff Profile of Buyer of Asset: Long Asset

A long posi on on an asset means buying the underlying asset and selling it at a future date at an
unknown price.

Asset Price Profit/Loss

Increases Profit

Decreases Loss

Payoff Profile for Seller of Asset: Short Asset

A short posi on on an asset means selling the underlying asset and buying it back at a future date at
an unknown price.
Asset Price Profit/Loss

Decreases Profit

Increases Loss

Payoff Profile for Buyer of Call Op ons: Long Call

A call op on gives the buyer the right to buy the underlying asset at the strike price specified in the
op on.

Asset Price Profit/Loss

Exceeds Strike Price Profit

Below Strike Price Loss (Limited to Premium)

Payoff Profile for Writer (Seller) of Call Op ons: Short Call

A call op on gives the buyer the right to buy the underlying asset at the strike price specified in the
op on.

Asset Price Profit/Loss

Exceeds Strike Price Loss

Below Strike Price Profit (Limited to Premium)

2.1.1 Payoff Profile for Writer of Call Op ons: Short Call

A call op on gives the buyer the right to buy the underlying asset at the strike price specified in the
op on. The profit/loss that the writer makes on the op on depends on the spot price of the
underlying.

"The writer of a call op on is said to be short the call op on, as they are obligated to sell the
underlying asset at the strike price if the buyer exercises the op on."

The payoff for the writer of a call op on can be summarized as follows:

 If the spot price of the underlying is above the strike price, the writer makes a loss equal to
the difference between the spot price and the strike price.

 If the spot price of the underlying is below the strike price, the writer makes a profit equal to
the premium received.

Spot Price Writer's Profit/Loss

Above Strike Price Loss (Spot Price - Strike Price)

Spot Price Writer's Profit/Loss

Below Strike Price Profit (Premium Received)

2.1.2 Payoff Profile for Buyer of Put Op ons: Long Put

A put op on gives the buyer the right to sell the underlying asset at the strike price specified in the
op on. The profit/loss that the buyer makes on the op on depends on the spot price of the
underlying.

"The buyer of a put op on is said to be long the put op on, as they have the right to sell the
underlying asset at the strike price if they choose to exercise the op on."

The payoff for the buyer of a put op on can be summarized as follows:

 If the spot price of the underlying is below the strike price, the buyer makes a profit equal to
the difference between the strike price and the spot price.

 If the spot price of the underlying is above the strike price, the buyer makes a loss equal to
the premium paid.

Spot Price Buyer's Profit/Loss

Below Strike Price Profit (Strike Price - Spot Price)

Above Strike Price Loss (Premium Paid)

2.1.3 Payoff Profile for Writer of Put Op ons: Short Put

The payoff for the writer of a put op on is the opposite of the payoff for the buyer of a put op on.

"The writer of a put op on is said to be short the put op on, as they are obligated to buy the
underlying asset at the strike price if the buyer exercises the op on."

The payoff for the writer of a put op on can be summarized as follows:

 If the spot price of the underlying is below the strike price, the writer makes a loss equal to
the difference between the strike price and the spot price.

 If the spot price of the underlying is above the strike price, the writer makes a profit equal to
the premium received.

Spot Price Writer's Profit/Loss

Below Strike Price Loss (Strike Price - Spot Price)

Above Strike Price Profit (Premium Received)

Op ons Strategies

2.2.1 Protec ve Put

A protec ve put is a strategy in which an investor buys a put op on on a stock they already own.
This provides protec on against a poten al decline in the stock price.

"A protec ve put is like an insurance policy for your stock por olio. It protects you against poten al
losses, but also limits your poten al gains."

The payoff for a protec ve put can be summarized as follows:

 If the stock price rises, the investor benefits from the increase in value.

 If the stock price falls, the investor can exercise the put op on and sell the stock at the strike
price, limi ng their losses.

Stock Price Investor's Profit/Loss

Rises Profit (Increase in Value)

Falls Limited Loss (Strike Price - Stock Price)

2.2.2 Covered Call

A covered call is a strategy in which an investor sells a call op on on a stock they already own. This
provides a source of income, but also limits the poten al gains from the stock.

"A covered call is like ren ng out your stock to someone else. You receive a premium, but also give up
some of the poten al upside."

The payoff for a covered call can be summarized as follows:

 If the stock price rises above the strike price, the investor misses out on some of the
poten al gains.

 If the stock price stays below the strike price, the investor receives the premium and keeps
the stock.

Stock Price Investor's Profit/Loss

Rises above Strike Price Missed Opportunity (Poten al Gains)

Stays below Strike Price Profit (Premium Received)

A Covered Call is a strategy used by investors who are neutral to moderately bullish about a stock. It
involves buying a stock and simultaneously selling a call op on at a strike price at which the investor
would be fine exi ng the stock.

"A Covered Call strategy is used to generate income from a stock that an investor already owns, while
also giving up some poten al upside in the stock's price."

Key Components:

 Buy a stock

 Sell a call op on at a strike price (OTM)

  Earn a premium from selling the call op on

Example:

Stock Purchase Price

Strike Price

Premium Received

Payoff:

 If the stock price stays at or below the strike price, the call buyer will not exercise the call,
and the investor retains the premium.

 If the stock price goes above the strike price, the call buyer will exercise the call, and the
investor will sell the stock at the strike price, earning the premium as addi onal gain.

Risk:

 If the stock price falls to zero, the investor loses the en re value of the stock, but retains the
premium.

 Maximum risk = Stock Price Paid - Call Premium

Reward:

 Limited to (Call Strike Price - Stock Price Paid) + Premium Received

Breakeven:

 Stock Price Paid - Premium Received

Long Combo Strategy

A Long Combo is a bullish strategy that involves selling an OTM put and buying an OTM call. This
strategy simulates the ac on of buying a stock, but at a frac on of the stock price.

"A Long Combo strategy is used to profit from a poten al increase in the stock price, while limi ng
the upfront cost."

Key Components:

 Sell an OTM put

 Buy an OTM call

 Earn a premium from selling the put and pay a premium for buying the call

Example:

Current Market Price

Put Strike Price

Put Premium Received

Call Strike Price

Call Premium Paid

Net Debit

Payoff:

 If the stock price rises, the strategy starts making profits.

 If the stock price falls, the poten al losses can be high.

Risk:

 Unlimited (Lower Strike + Net Debit)

Reward:

 Unlimited

Breakeven:

 Higher Strike + Net Debit

Protec ve Call/Synthe c Long Put Strategy

A Protec ve Call is a strategy used by investors who have gone short on a stock and buy a call to
hedge. This strategy creates a pay-off like a long put, but instead of having a net debit, the investor
creates a net credit.

"A Protec ve Call strategy is used to hedge against an unexpected rise in the stock price, while
retaining downside profit poten al."

Key Components:

 Short a stock

 Buy an ATM or slightly OTM call

 Earn a premium from shor ng the stock and pay a premium for buying the call

Example:

Current Market Price

Call Strike Price

Call Premium Paid

Net Credit

Payoff:

 If the stock price falls, the investor gains in the downward fall in the price.

 If the stock price rises, the loss is limited, and the pay-off from the long call will increase,
compensa ng for the loss in value of the short stock posi on.

Risk:

 Limited. Maximum Risk is Call Strike Price - Stock Price + Premium

Reward:

 Maximum is Stock Price - Call Strike Price## Covered Put Strategy

A Covered Put is a neutral to bearish strategy that involves selling a stock/index and selling a put
op on on the same stock/index. This strategy is used when the investor expects the price of the
stock/index to remain range-bound or move down.

"A Covered Put is a strategy where an investor sells a stock/index and sells a put op on on the same
stock/index, with the goal of profi ng from a decline in the stock/index price or genera ng income in
a neutral market."

Key Components:

 Sell a stock/index

 Sell a put op on on the same stock/index

 The put op on is generally an out-of-the-money (OTM) put

Example:

Suppose ABC Ltd. is trading at ₹4500 in June. An investor, Mr. A, shorts ₹4300 put by selling a July put
for ₹24 while shor ng an ABC Ltd. stock. The net credit received by Mr. A is ₹4500 + ₹24 = ₹4524.

Payoff Chart:

Stock Price Payoff from Stock Payoff from Put

₹4000 ₹500 -₹276

₹4100 ₹400 -₹176

₹4200 ₹300 -₹76

₹4300 ₹200 ₹24

Stock Price Payoff from Stock Payoff from Put

₹4400 ₹100 ₹24

₹4500 ₹0 ₹24

₹4524 -₹24 ₹24

₹4550 -₹50 ₹24

₹4600 -₹100 ₹24

₹4635 -₹135 ₹24

₹4650 -₹160 ₹24

Long Straddle Strategy

A Long Straddle is a vola lity strategy that involves buying a call op on and a put op on on the same
stock/index for the same maturity and strike price. This strategy is used when the investor expects
the stock/index price to show large movements.

"A Long Straddle is a strategy where an investor buys a call op on and a put op on on the same
stock/index for the same maturity and strike price, with the goal of profi ng from a significant
movement in the stock/index price."

Key Components:

 Buy a call op on on a stock/index

 Buy a put op on on the same stock/index

 The call and put op ons have the same maturity and strike price

Example:

Suppose Ni y is at 11000 on 31st January. An investor, Mr. A, enters a long straddle by buying a
February ₹11000 Ni y Put for ₹122 and a February ₹11000 Ni y Call for ₹85. The net debit taken to
enter the trade is ₹207, which is also his maximum possible loss.

Payoff Chart:

Ni y Index Payoff from Put Payoff from Call

₹10100 ₹778 -₹85

₹10200 ₹678 -₹85

Ni y Index Payoff from Put Payoff from Call

₹10300 ₹578 -₹85

₹10400 ₹478 -₹85

₹10500 ₹378 -₹85

₹10600 ₹278 -₹85

₹10700 ₹178 -₹85

₹10793 ₹85 -₹85

₹11000 -₹122 -₹85

₹11100 -₹122 ₹15

₹11207 -₹122 ₹122

Short Straddle Strategy

A Short Straddle is the opposite of a Long Straddle. It is a strategy that involves selling a call op on
and a put op on on the same stock/index for the same maturity and strike price. This strategy is
used when the investor expects the stock/index price to show li le movement.

"A Short Straddle is a strategy where an investor sells a call op on and a put op on on the same
stock/index for the same maturity and strike price, with the goal of profi ng from a lack of movement
in the stock/index price."

Key Components:

 Sell a call op on on a stock/index

 Sell a put op on on the same stock/index

 The call and put op ons have the same maturity and strike price

Example:

Suppose Ni y is at 11000 on 31st January. An investor, Mr. A, enters into a short straddle by selling a
February ₹11000 Ni y Put for ₹122 and a February ₹11000 Ni y Call for ₹85. The net credit received
is ₹207, which is also his maximum possible profit.

Payoff Chart:
Ni y Index Payoff from Put Payoff from Call

₹10100 -₹778 ₹85

₹10200 -₹678 ₹85

₹10300 -₹578 ₹85

₹10400 -₹478 ₹85

₹10500 -₹378 ₹85

₹10600 -₹278 ₹85

₹10700 -₹178 ₹85

₹10793 -₹85 ₹85

₹11000 ₹122 ₹85

₹11100 ₹122 -₹15

₹11207 ₹122 -₹122

Long Strangle Strategy

A Long Strangle is a slight modifica on to the Straddle strategy. It involves buying a slightly out-of-
the-money (OTM) put and a slightly OTM call of the same underlying stock/index and expira on
date.

"A Long Strangle is a strategy where an investor buys a slightly out-of-the-money (OTM) put and a
slightly OTM call of the same underlying stock/index and expira on date, with the goal of profi ng
from a significant movement in the stock/index price."

Key Components:

 Buy a slightly OTM put op on on a stock/index

 Buy a slightly OTM call op on on the same stock/index

 The put and call op ons have the same expira on date

Example:

Suppose Ni y is at 11000 in January. An investor, Mr. A, executes a Long Strangle by buying a ₹10800
Ni y Put for a premium of ₹122 and a ₹11200 Ni y Call for a premium of ₹85.
 Payoff Chart:

Ni y Index Payoff from Put Payoff from Call

₹10100 ₹778 -₹85

₹10200 ₹678 -₹85

₹10300 ₹578 -₹85

₹10400 ₹478 -₹85

₹10500 ₹378 -₹85

₹10600 ₹278 -₹85

₹10700 ₹178 -₹85

₹10793 ₹85 -₹85

₹11000 -₹122 -₹85

₹11100 -₹122 ₹15

₹11207 -₹122 ₹122

A Long Strangle is a strategy that involves buying an out-of-the-money (OTM) put and an OTM call of
the same underlying stock and expira on date.

"A Long Strangle is a strategy that tries to profit from a significant movement in the underlying stock,
either upwards or downwards."

Key Components:

 Buy an OTM put

 Buy an OTM call

 Same underlying stock and expira on date

Example:

Ni y Index Current Value Sell Call Op on Strike Price Premium Received Sell Put Op on Strike Price Premium Received

11000 11200 23 10800 43

 Breakeven Points:

 Upper Breakeven Point = Strike Price of Long Call + Net Premium = 11223

 Lower Breakeven Point = Strike Price of Long Put - Net Premium = 10757

Payoff Chart:

Ni y Closes at Net Payoff from Put Net Payoff from Call Net Payoff

10100 657 -23 634

10200 557 -23 534

... ... ... ...

11223 0 0 0

11300 -43 77 34

... ... ... ...

Short Strangle Strategy

A Short Strangle is a strategy that involves selling an OTM put and an OTM call of the same
underlying stock and expira on date.

"A Short Strangle is a strategy that tries to profit from a lack of significant movement in the
underlying stock."

Key Components:

 Sell an OTM put

 Sell an OTM call

 Same underlying stock and expira on date

Example:

Ni y Index Current Sell Call Op on Strike Premium Sell Put Op on Strike Premium
Value Price Received Price Received

11000 11200 23 10800 43

Breakeven Points:

 Upper Breakeven Point = Strike Price of Short Call + Net Premium = 11223

 Lower Breakeven Point = Strike Price of Short Put - Net Premium = 10757
 Payoff Chart:

Ni y Closes at Net Payoff from Put Net Payoff from Call Net Payoff

10100 -657 23 -634

10200 -557 23 -534

... ... ... ...

11223 0 0 0

11300 43 -77 -34

... ... ... ...

Collar Strategy

A Collar is a strategy that involves buying a stock, buying a put, and selling a call.

"A Collar is a strategy that tries to limit the risk of a stock investment by buying a put and selling a
call."

Key Components:

 Buy a stock

 Buy a put

 Sell a call

 Same underlying stock and expira on date

Example:

Stock Price Buy Put Op on Strike Price Premium Paid Sell Call Op on Strike Price Premium Received

4758 4700 27 5000 39

Breakeven Point:

 Breakeven Point = Purchase Price of Underlying + Put Premium - Call Premium = 4746

Payoff Chart:

Stock Price Payoff from Stock Payoff from Put Payo

4400 -358 300 0

 Stock Price Payoff from Stock Payoff from Put Payo

4500 -308 200 0

... ... ... ...

5000 0 0 -10

5100 342 0 -10

... ... ... ...

Bull Call Spread Strategy

A Bull Call Spread is a strategy that involves buying an in-the-money (ITM) call and selling an out-of-
the-money (OTM) call.

"A Bull Call Spread is a strategy that tries to profit from a moderate to significant movement in the
underlying stock."

Key Components:

 Buy an ITM call

 Sell an OTM call

 Same underlying stock and expira on date

Example:
Ni y Index Current Buy ITM Call Strike Premium Sell OTM Call Strike Premium
Value Price Paid Price Received

11100 11000 170.45 11400 35.40

Breakeven Point:

 Breakeven Point = Strike Price of ITM Call + Net Premium = 11135.05

Payoff Chart:

Ni y Closes at Payoff from ITM Call Payoff from OTM Call Net Payoff

11000 0 0 0

11100 0 0 0

... ... ... ...

Ni y Closes at Payoff from ITM Call Payoff from OTM Call Net Payoff

11400 400 -400 0

11500 500 -500 0

... ... ... ...

A Bull Call Spread is a strategy used when the investor is moderately bullish on the market. It
involves buying a call op on with a lower strike price and selling a call op on with a higher strike
price.

"A Bull Call Spread is a strategy that brings down the breakeven point, reduces the cost of the trade,
and reduces the loss on the trade."

Key Components:

 Buy a call op on with a lower strike price

 Sell a call op on with a higher strike price

Ni y Index Current Value 11100

Buy Call Op on Strike Price 11400

Premium 35.40

Sell Call Op on Strike Price 11000

Premium 170.45

Net Premium Paid 135.05

Breakeven Point 11135.05

Example:

Payoff Chart:

Ni y Closes at Net Payoff from Call Buy Net Payoff from Call Sol

10700 -170.45 35.40

11000 -170.45 35.40

Ni y Closes at Net Payoff from Call Buy Net Payoff from Call Sol

1135.05 -35.40 35.40

1200 29.55 35.40

1250 79.55 35.40

1300 129.55 35.40

1350 179.55 35.40

1400 229.55 35.40

1450 279.55 -14.60

1500 329.55 -64.60

1550 379.55 -114.60

1600 429.55 -164.60

Bull Put Spread Strategy

A Bull Put Spread is a strategy used when the investor is moderately bullish on the market. It
involves selling a put op on with a higher strike price and buying a put op on with a lower strike
price.

"A Bull Put Spread is a strategy that earns a net income for the investor as well as limits the downside
risk of a Put sold."

Key Components:

 Sell a put op on with a higher strike price

Ni y Index Current Value 11100

Sell Put Op on Strike Price 11000

Premium 21.45

Buy Put Op on Strike Price 10800

Ni y Index Current Value 11100

Premium 3.00

Net Premium Received 18.45

Breakeven Point 10981.55

 Buy a put op on with a lower strike price

Example:

Ni y Closes at Net Payoff from Put Sold Net Payoff from Put Bought Net Payoff

10400 397 -578.55 -181.55

10500 297 -478.55 -181.55

10600 197 -378.55 -181.55

10700 97 -278.55 -181.55

10800 -3 -178.55 -181.55

10900 -3 -78.55 -81.55

10981.55 -3 3 0

11000 -3 21.45 18.45

Ni y Closes at Net Payoff from Put Sold Net Payoff from Put Bought Net Payoff

11200 -3 21.45 18.45

11300 -3 21.45 18.45

11400 -3 21.45 18.45

11500 -3 21.45 18.45

11600 -3 21.45 18.45

11700 -3 21.45 18.45

11800 -3 21.45 18.45

Payoff Chart:

Bear Call Spread Strategy

A Bear Call Spread is a strategy used when the investor is mildly bearish on the market. It involves
selling a call op on with a lower strike price and buying a call op on with a higher strike price.

"A Bear Call Spread is a strategy that earns a net income for the investor as well as limits the
downside risk of a Call sold."

Key Components:

 Sell a call op on with a lower strike price

 Buy a call op on with a higher strike price

ABC Ltd. Closes at Net Payoff from Call Sold Net Payoff from Call Bought Net Payoff

2100 154 -49 105

2200 154 -49 105

2300 154 -49 105

2400 154 -49 105

2500 154 -49 105

ABC Ltd. Closes at Net Payoff from Call Sold Net Payoff from Call Bought Net Payoff

2600 154 -49 105

2700 54 -49 5

2705 49 -49 0

2800 -46 -49 -95

2900 -146 51 -95

3000 -246 151 -95

3100 -346 251 -95

3200 -446 351 -95

3300 -546 451 -95

Example:

ABC Ltd. Current Value

Sell Call Op on Strike Price

Premium

Buy Call Op on Strike Price

Premium

Net Premium Received

Breakeven Point

Payoff Chart:

Bear Put Spread Strategy

 A Bear Put Spread is a strategy used when the investor is moderately bearish on the market. It
involves buying a put op on with a higher strike price and selling a put op on with a lower strike
price.

"A Bear Put Spread is a strategy that brings down the cost and raises the breakeven on buying a Put
(Long Put)."

Key Components:

ABC Ltd. Current Value 2694

Buy Put Op on Strike Price 2800

Premium 132

Sell Put Op on Strike Price 2600

Premium 52

Net Premium Paid 80

Breakeven Point 2720

 Buy a put op on with a higher strike price

 Sell a put op on with a lower strike price

Example:

Payoff Chart:

ABC Ltd. Closes at Net Payoff from Put Buy Net Payoff from Put Sold Net Payoff

2200 468 -348 120

2300 368 -248 120

2400 268 -148 120

2500 168 -48 120

2600 68 52 120

2720 -52 52 0
ABC Ltd. Closes at Net Payoff from Put Buy Net Payoff from Put Sold Net Payoff

2700 -32 52 20

2800 -132 52 -80

2900 -132 52 -80

3000 -132 52 -80

3100 -132 52 -80

A Bear Put Spread is a strategy used when an investor is moderately bearish on the market. It
involves buying a Put op on with a higher strike price and selling a Put op on with a lower strike
price.

Key Characteris cs:

 Reduces the cost of the trade

 Reduces the loss on the trade

 Raises the breakeven point

 Limited gains

Payoff Chart:

Stock Price Payoff

Lower Strike Limited Loss

Higher Strike Limited Gain

Between Strikes Profit

Example:

Suppose an investor buys a Put op on with a strike price

of 2800andsellsaPutop onwithastrikepriceof2800andsellsaPutop onwithastrikepriceof2700. The
cost of the trade is reduced, and the loss on the trade is limited.

Long Call Bu erfly

A Long Call Bu erfly is a strategy used when an investor is expec ng very li le movement in the
stock price/index. It involves selling two At-The-Money (ATM) Call op ons, buying one In-The-Money
(ITM) Call op on, and buying one Out-Of-The-Money (OTM) Call op on.

Key Characteris cs:

  Offers a good risk/reward ra o

 Low cost

 Limited losses

 Maximum reward occurs when the stock/index is at the middle strike at expira on

Stock Price Payoff

Lower Strike Limited Loss

Middle Strike Maximum Reward

Higher Strike Limited Loss

Payoff Chart:

Example:

Suppose an investor sells two ATM Call op ons with a strike price
of 11000,buysoneITMCallop onwithastrikepriceof11000,buysoneITMCallop onwithastrikepriceof10
900, and buys one OTM Call op on with a strike price
of 11100.Thenetdebi s11100.Thenetdebi s9.75.

Stock Payoff from 2 ATM Payoff from 1 ITM Payoff from 1 OTM Net
Price Calls Call Call Payoff

10700 -195.8 141.55 64 -9.75

11000 -195.8 41.55 64 90.25

11300 -95.8 -8.45 64 40.25

Short Call Bu erfly

A Short Call Bu erfly is a strategy used when an investor is expec ng large vola lity in the stock
price/index. It involves buying two ATM Call op ons, selling one ITM Call op on, and selling one OTM
Call op on.

Key Characteris cs:

 Offers a good risk/reward ra o

 Limited losses

 Maximum profit occurs if the stock finishes on either side of the upper and lower strike
prices at expira on
Payoff Chart:
Stock Price Payoff

Lower Strike Limited Loss

Middle Strike Limited Loss

Higher Strike Limited Loss

Example:

Suppose an investor buys two ATM Call op ons with a strike price
of 11000,sellsoneITMCallop onwithastrikepriceof11000,sellsoneITMCallop onwithastrikepriceof109
00, and sells one OTM Call op on with a strike price
of 11100.Thenetcredi s11100.Thenetcredi s9.75.

Stock Price Payoff from 2 ATM Calls Payoff from 1 ITM Call Payoff from 1 OTM Call Net Payoff

10700 -195.8 141.55 64 9.75

11000 -195.8 41.55 64 -90.25

11300 -95.8 -8.45 64 -40.25

Long Call Condor

A Long Call Condor is a strategy used when an investor is expec ng li le vola lity in the stock
price/index. It involves buying one ITM Call op on, selling one ITM Call op on, selling one OTM Call
op on, and buying one OTM Call op on.

Key Characteris cs:

 Offers a good risk/reward ra o

 Limited losses

 Maximum profit occurs if the stock finishes between the middle strike prices at expira on

Stock Price Payoff

Lower Strike Limited Loss

Middle Strike Maximum Reward

Higher Strike Limited Loss

Payoff Chart:
Example:

Suppose an investor buys one ITM Call op on with a strike price

of 10800,sellsoneITMCallop onwithastrikepriceof10800,sellsoneITMCallop onwithastrikepriceof109
00, sells one OTM Call op on with a strike price
of 11100,andbuysoneOTMCallop onwithastrikepriceof11100,andbuysoneOTMCallop onwithastrike

Stock Payoff from 1 Payoff from 1 Payoff from 1 Payoff from 1 Net
Price ITM Call ITM Call OTM Call OTM Call Payoff

10700 241 -126 -83 51 -83

11000 241 -126 -83 51 83

11300 241 -126 -83 51 83

priceof11200. The net debit is $83.

A Long Call Condor is a trading strategy that involves buying and selling call op ons with different
strike prices. The goal of this strategy is to profit from a stock's price movement while limi ng
poten al losses.

Strategy

 Buy 1 OTM Call Op on with a lower strike price

 Sell 1 ITM Call Op on with a middle strike price

 Sell 1 ITM Call Op on with a higher middle strike price

 Buy 1 OTM Call Op on with a higher strike price

Strike Price Premium Break-Even Point

Lower Strike 51 10883

Middle Strike 126 11117

Higher Middle Strike 83 11117

Higher Strike 51 11117

Break-Even Points
Payoff Chart
Ni y Closes Net Payoff

10700 -83

10800 -83

10850 -33

10883 0

10950 17

11000 17

11050 17

11100 17

11117 0

11200 -83

Example

Suppose Ni y is at 11000 in June. An investor enters a condor trade by buying a 10800 strike price
call at a premium of 241, sells a 10900 strike price call at a premium of 126, sells another call at a
strike price of 11100 at a premium of 83, and buys a call at a strike price of 11200 at a premium of
51. The net debit from the trades is 83. This is also his maximum loss.

Short Call Condor

A Short Call Condor is a trading strategy that involves selling and buying call op ons with different
strike prices. The goal of this strategy is to profit from a stock's price movement while limi ng
poten al losses.

Strategy

 Sell 1 ITM Call Op on with a lower strike price

 Buy 1 ITM Call Op on with a lower middle strike price

 Buy 1 OTM Call Op on with a higher middle strike price

 Sell 1 OTM Call Op on with a higher strike price

Ni y Closes Net Payoff

10700 83

10800 83

10850 33

10883 0

10950 -17

11000 -17

11050 -17

11100 -17

11117 0

11200 -83

Break-Even Points

Strike Price Premium Break-Even Point

Lower Strike 241 10883

Lower Middle Strike 126 10883

Higher Middle Strike 83 11117

Higher Strike 51 11117

Payoff Chart

Example

Suppose Ni y is at 11000. Mr. XYZ expects high vola lity in the Ni y and expects the market to break
open significantly on any side. Mr. XYZ sells 1 ITM Ni y Call Op ons with a strike price of 10800 at a
premium of 241, buys 1 ITM Ni y Call Op on with a strike price of 10900 at a premium of 126, buys
 1 OTM Ni y Call Op on with a strike price of 11100 at a premium of 83, and sells 1 OTM Ni y Call
Op on with a strike price of 11200 at a premium of 51. The Net credit is of 83.

Vola lity

Vola lity is the degree of varia on of a price me series, such as the closing prices of a par cular
stock. This is measured by the standard devia on of the me series, a sta s cal measure of
dispersement.

"Vola lity is not concerned with the direc on of change, but with the amount of change."

Types of Vola lity

 Historical Vola lity: gauges the fluctua ons of underlying securi es by measuring the price
changes over a predetermined period of me in the past.

 Implied Vola lity: indicates the extent to which the return of the underlying asset may
fluctuate between now and the expira on date of the op on.

 Realized Vola lity: tells us the actual vola lity realized for a future period of me.

Calcula ng Historical Vola lity

1. Compute the log returns for the me series

2. Compute the standard devia on of the log returns

Date Ni y Close Price Log Returns

19-Jan-18 10921 0.00653

22-Jan-18 10992.5 0.01044

23-Jan-18 11107.85 -0.00025

... ... ...

3. Calculate the annualized vola lity

Annualized Vola lity: 16.5%## Impact of Vola lity on Op ons

The rela onship between Vola lity and op ons strategies is crucial. As vola lity increases, the price
of an op on also increases, assuming all other factors remain the same. Conversely, a decrease in
vola lity leads to a decrease in the op on's price.

Op on Type Rise in Implied Vola lity Fall in Implied Vola lity

Long Call Posi ve Nega ve

Op on Type Rise in Implied Vola lity Fall in Implied Vola lity

Short Call Nega ve Posi ve

Long Put Posi ve Nega ve

Short Put Nega ve Posi ve

How Vola lity Affects Op on Prices

Understanding Vola lity

Vola lity is a measure of how uncertain we are about the expected future stock price movements. As
implied vola lity increases, the chance that the stock can move a lot in either direc on increases, and
the price of both calls and puts increases, given everything else being the same.

Key Concepts

 Implied Vola lity: a measure of the market's expected vola lity of a stock

 Op ons Strategies: various techniques used to take advantage of bullish, bearish, or neutral
views on the underlying asset

 Call Op on: gives the buyer the right to buy an asset by a certain date for a certain price

 Put Op on: gives the buyer the right to sell an asset by a certain date for a certain price