Lecture 8 Option Strategies

Lecture 8 Option Strategies - L ectu re 8: (Ch10) Option S...

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Lecture 8: (Ch10) Option Strategies The alternative: Take a single option position or combine it with the underlying Take positions in 2 or more options of the same type (a spread) Single Option Position
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Option and underlying Protective Put A protective put portfolio involves a long position in the underlying stock and a long position in a put option. The idea is to ‘put a floor’ under the value of a portfolio. Use: limit potential loss from holding stocks Position: long the stock and long the put Payoff: Use of Protective Put Hedging. If you would like to invest in a stock but are unwilling to bear potential losses beyond some given level, buy put options. Whatever happens to the stock price, at least a payoff of the strike price can be obtained. This strategy offers some insurance against stock price decline in which limits losses. Remember it is not free (cost = put premium)
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A covered call is a portfolio consisting of a long position in underlying stock and a short position in the call option. Use: limit potential loss from writing a call Position: buy the stock and write a call Spreads A spread is a combination of either two or more call or put options on the same stock with differing exercise prices or times to maturity. A money spread involves the purchase of one option and the simultaneous sale of another with different exercise price such as a bull (bullish) spread or bear (bearish) spread. A time spread refers to the sale and purchase of options with different
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Lecture 8 Option Strategies - L ectu re 8: (Ch10) Option S...

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