Scribd
Upload
306 views13 pages

Hedging Strategies Using Options

This document discusses various hedging strategies using options, including covered call writing, covered put writing, protective call buying, protective put buying, straddle, strap, strip, strangle, butterfly spread, and condor. Covered call writing involves writing a call while holding a long position in the underlying. Covered put writing involves writing a put while holding a short position in the underlying. Protective call/put buying involves buying a call/put to protect against losses when holding a short position. Straddle, strap, and strip involve combinations of calls and puts. Strangle uses options at different strike prices. Butterfly spread and condor positions use options at multiple strike prices to profit from little price movement.

Uploaded by

Dushyant Mudgal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
306 views13 pages

Hedging Strategies Using Options

This document discusses various hedging strategies using options, including covered call writing, covered put writing, protective call buying, protective put buying, straddle, strap, strip, strangle, butterfly spread, and condor. Covered call writing involves writing a call while holding a long position in the underlying. Covered put writing involves writing a put while holding a short position in the underlying. Protective call/put buying involves buying a call/put to protect against losses when holding a short position. Straddle, strap, and strip involve combinations of calls and puts. Strangle uses options at different strike prices. Butterfly spread and condor positions use options at multiple strike prices to profit from little price movement.

Uploaded by

Dushyant Mudgal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Hedging Strategies Using Options

Basic Strategy with Options


• Since there are two types of options; there can be
four types of positions which can be taken. These
positions can be
1. A long position in call option / Buying a call option
2. A short position in call option / Writing a call option
3. A long position in put option / Buying a put option
4. A short position in put option / Writing a put option
Hedging Strategies with Options
• Covered Call Writing
• Covered Put Writing
• Protective Call Buying
• Protective Put Buying
• Straddle
• Strap
• Strip
• Strangle
• Butterfly Spread
• Condor
Covered Call Writing
• A Covered Call Writing implies that writing a call
having long position in the cash / future market.
• In this case, the trader has a long position in cash /
future market and short position in call option
market.
• This strategy is used to generate value from the
stocks, which a trader holds in his investment
portfolio and does not wish to sell, as he is bullish in
the medium to long term although in the short term
he expects the price to remain stable.
Covered Put Writing
• A Covered Put Writing implies that writing a
put having short position in the cash / future
market. It is basically a bearish strategy.
• This strategy is used when the trader’s view is
moderately bearish and he does not expect
the stock to fall in the near future.
Protective Call Buying
• The strategy involves buying a call option to protect form an
unlimited loss situation.
• Suppose, based on negative outlook on a particular stock or
index, a trader short the stock/ Index futures, which involves
an unlimited profit potential but also unlimited risk.
• To cover up the unlimited loss, trader may buy call options
which give him protection from an upside movement in the
stock/ market.
• This strategy is used by when the market outlook is bearish
and the trader also wants to protect himself against any
upward movement.
Straddle
• Straddle involves buying a combination of one at
the money call and one at the money put option
with the same maturity and the same strike price.
• This strategy is useful when the trader is expecting a
substantial increase or decrease in the value of the
share; he can establish a long position in the
straddle.
• If he is expecting a very narrow range in the market;
he can establish a short position in the straddle.
Strap
• A Strap position is just an extension of straddle position. Strap
buying involves buying a combination of two calls and one
put option with the same maturity date and same strike price.
• It is undertaken by the traders having a volatile view with
positive bias. The traders having a range bound view with
negative bias usually sells the strap.
• This strategy is useful when the trader is expecting a
substantial increase or decrease in the value of the share with
more possibility of an upward move; he can establish a long
position in the strap. If he is expecting a very narrow range in
the market; he can establish a short position in the strap.
Strip
• A Strip position is also an extension of straddle position. Strip
buying involves buying a combination of one call and two puts
option with the same maturity date and same strike price.
• It is undertaken by the traders having a volatile view with
negative bias. The traders having a range bound view with
positive bias usually sells the strip.
• This strategy is useful when the trader is expecting a substantial
increase or decrease in the value of the share with more
possibility of a downward move; he can establish a long
position in the strap. If he is expecting a very narrow range in
the market; he can establish a short position in the strip.
Strangle
• A Strangle position is a variant of the straddle position. While
a straddle buyers buys call and put options at the same strike
price, a strangle buyer buys both the options at different
strike price, normally both out of the money options.
• A long strangle holder like the long straddle holder also
expects the market to go up or down substantially. As the
position is generally taken in out of the money options, the
cost of this position is lower than the cost of a long straddle.
• In case of a short strangle , trader writes a combination of
one out of the money call and one out of the money put as
he expects the market either to remain stable
Butterfly Spread
• A Butterfly Spread can be created through different
combination of call and put options. To establish a butterfly
spread, a trader takes position in four option contracts at
three different strike prices.
• He may buy call at two extreme strike prices K1 and K3 and
sell two calls at the middle strike price K2 where K1<K2<K3.
The perception of a butterfly spread buyer is that the market
will remain more or less stable till expiration of the option.
• This strategy is useful when the trader expects the price of
the underlying asset to be more or less stable and he do not
want to bear risk.
Condor
• This strategy is a variant to the butterfly spread.
The perception of the butter fly spread is the
same as that of a butterfly spread buyer i.e. the
market will remain more or less stable till
expiration.
• This strategy involves Buying call at two
extreme strike prices K1 and K4 and sell two calls
at the middle strike price K2 and K3 where
K1<K2<K3 < K4
Thanks

You might also like