L5.pdf - Trading Strategies Involving Options Topic 5 1 Strategies to be Considered � � � � Bond plus option to create principal protected note

L5.pdf - Trading Strategies Involving Options Topic 5 1...

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Trading Strategies Involving Options Topic 5 1
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Strategies to be Considered Bond plus option to create principal protected note Stock plus option Two or more options of the same type (a spread; i.e: two or more call or more put) Two or more options of different types (a combination, i.e:both calls and puts on the same stock) 2
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Principal Protected Note Allows investor to take a risky position without risking any principal Example: $1000 instrument consisting of 3-year zero-coupon bond with principal of $1000 3-year at-the-money call option on a stock portfolio currently worth $1000 3
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Principal Protected Notes continued Viability depends on Level of dividends Level of interest rates Volatility of the portfolio Variations on standard product Out of the money strike price Caps on investor return Knock outs, averaging features, etc 4
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Positions in an Option & the Underlying Asset Profit S T K Profit S T K Profit S T K Profit S T K (a) (b) (c) (d) 5
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Bull Spread Using Calls K 1 K 2 Profit S T 6
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Bull Spread Using Puts K 1 K 2 Profit S T 7
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Bear Spread Using Puts K 1 K 2 Profit
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