asx_UnderstandingOptionStrategies

asx_UnderstandingOptionStrategies - Options Strategies 26...

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Options Strategies 26 proven options strategies for clever investors
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HOW TO USE THIS BOOKLET This brochure details more than two dozen strategies for all market conditions, with varying exposures to volatility and with differing potential for profit and loss. Of course there are various ways to construct most strategies. We have underlined the most common method and used that method in our explanations of Profit, Loss, Volatility and Time Decay. These strategies are generally traded as a combination, meaning all legs are traded at the same time. They can be traded over time to best suit your view. This booklet contains payoff diagrams for some of the more popular strategies used by option traders. Bullish Strategies Bearish Strategies Neutral Strategies Event Driven Strategies Stock Combination Strategies. This strategy booklet is not intended to cover every possible options strategy, but to explain the more popular strategies. It is assumed that you are familiar with option pricing fundamentals, and the concepts of volatility and time decay. Note that for the purpose of simplicity, transaction costs, tax considerations and the cost of funding are not included in the examples. www.asx.com.au/options
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0 A Profit Loss Strike price At expiry 1 month 3 month Bullish Bearish Neutral Event Driven Stock Combinations HOW TO UNDERSTAND THE DIAGRAMS An illustration is used with each strategy to demonstrate the effect of time decay on the total option premium involved in the position. The basic diagram in the black shows the profit/loss scale on the left vertical axis. The horizontal zero line in the middle is the break even point, not including transation costs. Therefore, anything above the line indicates profits, anything below it, losses. The price of the underlying instrument would be represented by a scale along the bottom, with lower prices to the left and higher prices to the right. “A”, “B”, “C” and “D” in the diagrams indicate the strike price(s) involved. Arrows on the diagrams indicate what impact the decay of option prices over time has on the total position. The green line reflects the situation with three months left until expiration, the maroon line the status with 1 month left and the teal line the situation at expiration, which is also reflected in the orange box at the top of each strategy page. Note that decay accelerates as expiry approaches.
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1 LONG CALL Construction: Buy 1 Call at strike price A. Margins: No. 0 A Profit Loss Your Market Outlook: Bullish. The share price will rise well above the strike price A. The more bullish your view the further out of the money you can buy to create maximum leverage. Profit: The profit increases as the market rises. The break-even point will be the options strike price A, plus the premium paid for the option.
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