Neutral Strategies - Options

8/16/2019 Neutral Strategies - Options

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Neutral Strategies -

Options

RAVI - IBA


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Strategy 1: LongStraddle

• Straddle is neither bullish nor bearishstrategy; it is a market neutralstrategy. Here a trader ishes to take

ad!antage o" the !olatility in themarket.

• #his strategy in!ol!es buying o" one

$all option and one %ut option o" thesame strike pri&e' same e(piry dateand o" the same underlying asset.


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Strategy 1: LongStraddle

• No a trader is bound to make pro)ts on&esto&k mo!es in either dire&tion.

• I" the pri&es rise signi)&antly' the &all

generates in&ome and put e(pires orthless.• I" the pri&es de&rease signi)&antly' the put

generates in&ome and &all e(pires orthless.

• Here a trader is looking "or high !olatility and

e(pe&ts the market to mo!e ith highmagnitude.

• Risk: *imited - Reward: +nlimited


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Construction - LongStraddle

• Buy 1 Call Option : Buy 1 Put Option

Example:

• Ni"ty is trading at ,, le!el; /r. 0 e(pe&ts the

market to mo!e ith high magnitude in either o"the dire&tions' he ill implement *ong StraddleStrategy.

• He ill buy one , $all Option "or a premium

o" Rs. 12 3 buy one , %ut Option "or apremium o" Rs. 4,. *ot si5e o" NI6#7 is ,. Hisnet in!estments ill be Rs. 89,. :12,?


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*ong Straddle

• Case 1: At e(piry i" NI6#7 &loses at@4 le!el' then /r. 0 ill make a pro)to" Rs. ,. :4-4,=- 12=>,?

• Case 2: At e(piry i" NI6#7 &loses at,1' then /r. 0 ill make a loss o" Rs.@9,. :1-4,=-12=>,?

• Case 3: At e(piry i" NI6#7 &loses at,4' then /r. 0 ill make a pro)t o"Rs. 1,. :@-12=-4,=>,?


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Strategy 2: ShortStraddle

C(planation

• #his strategy is Dust the opposite o" *ongStraddle. A trader should adopt this strategyhen he e(pe&ts less !olatility in the near "uture.

• Here' a trader will sell one Call Option & one PutOption of the same strike price, same expiry dateand of the same underlying asset .

• I" the sto&kEinde( ho!ers around the same le!elsthen both the options ill e(pire orthless andthe option riter i.e. trader= ill get thepremium.


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Strategy 2: ShortStraddle

C(planation

• Hoe!er this is a ery risky strategy . I"the pri&e mo!es up or don sharply

then the losses ill be signi)&ant "or theoption riter trader=.

• So this strategy should be implemented

only i" you are ready to take &al&ulatedrisk i.e. it should be pre&isely Fuanti)ed.

• Risk: +nlimited E Reward: *imited


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Construction – Short Straddle

• Sell 1 Call Option - Sell 1 Put Option

!a"ple:

• Suppose NI6#7 is trading around , le!els'

/r. 0 does not e(pe&t the market to mo!esharply in the near "uture and implements aShort Straddle Strategy. He ill sell one ,$all Option "or a premium o" Rs. 1 3 sell

one , %ut Option "or a premium o" Rs. G.*ot si5e o" NI6#7 is ,. His a&&ount ill get&redited by Rs. 8. :1,?


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Construction – Short Straddle

• Case 1: At e(piry i" NI6#7 &loses at,' then /r. 0 ill make a loss o"Rs. 1. :1= < G - =>,?

• Case 2: At e(piry i" NI6#7 &loses at,,' then /r. 0 ill make a pro)t o"Rs. 4,. :1-,= < G=>,?

• Case 3: At e(piry i" NI6#7 &loses at,@' then /r. 0 ill make a loss o"Rs. 1. :G= -1=>,?


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Strategy 3: LongStrangle

• C(planation

• A Strangle is similar to Straddle. In Strangle' atrader ill pur&hase one O#/ $all Option and

one O#/ %ut Option' o" the same e(piry dateand the same underlying asset.

• #his strategy ill redu&e the entry &ost "ortrader and it is also &heaper than straddle. A

trader ill make pro)ts' i" the market mo!essharply in either dire&tion and gi!es e(tra-ordinary returns in the near "uture so thateither o" the options ill make money.


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Strategy 3: LongStrangle

• C(planation

• In &ase o" lo !olatility a trader illlose his entire in!estment i.e. thepremium paid "or buying the options.

• #he !olatility should be on higher side.Also' the !olatility reFuired "or

strangle to make pro)ts should bemore than the !olatility reFuired "orstraddle to make pro)ts.


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*ong Strangle

• In &ase o" lo !olatility a trader ill lose hisentire in!estment i.e. the premium paid "orbuying the options.

•

#he !olatility should be on higher side. Also'the !olatility reFuired "or strangle to makepro)ts should be more

• than the !olatility reFuired "or straddle to

make pro)ts.• Risk: *imited

• Reward: +nlimited


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*ong Strangle

• Construction

• Buy 1 O#/ $all Option

• Buy 1 O#/ %ut Option

•

C(ample• I" NI6#7 is trading around , le!els and /r. 0

e(pe&ts the market to rally signi)&antly on eitherside' he applies a Strangle Strategy.

•

i= He buys one ,2 O#/ $all Option "or apremium o" Rs. ,, 3 ii= buys one ,1 O#/ %utOption "or a premium o" Rs. ,.

• His net in!estment ill be Rs. ,,. :,,,?


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*ong Strangle C(ample

• Case 1: I" NI6#7 e(pires at @G'then /r. 0 ill make a pro)t o" Rs.89,. :2-,=-,,=>,?

• Case 2: I" NI6#7 e(pires at ,1'then /r. 0 ill make a loss o" Rs.,,. :,,,?

• Case 3: I" NI6#7 e(pires at ,4'then /r. 0 ill make a pro)t o" Rs.89,. :2-,,=-,=>,?


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#$ Short Strangle

!planation:

#his strategy is similar to Short Straddle; the onlydieren&e is o" the strike pri&es at hi&h thepositions are built.

Short Strangle in!ol!es selling o" one O#/ $allOption and selling o" one O#/ %ut Option' o" thesame e(piry date and same underlying asset.

Here the probability o" making pro)ts is more asthere is a spread beteen the to strike pri&es'and i" the markets do remain less !olatile' thenthis strategy ill start making pro)ts "or traders.


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#$ Short Strangle

#he ideology behind this strategy is thatthe market ill not be mu&h !olatile in thenear "uture and the e(pe&ted !olatility ill

lie beteen the strike pri&es. #his strategy is used by e(pert tradersho Fuanti"y the implied !olatility

a&&urately.• Risk: +nlimited

• Reward: *imited


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$onstru&tion J ShortStrangle

• Sell 1 O#/ $all Option

• Sell 1 O#/ %ut Option


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C(ample Short Strangle

• Suppose NI6#7 is trading around , oddpoints' /r. 0 does not e(pe&t the market tomo!e mu&h in the near "uture.

• As he is neutral about the !olatility o" NI6#7 heill enter in a Short Strangle Strategy.

• i= He ill sell one ,2 O#/ $all Option "or apremium o" Rs. ,, 3 ii= sell one ,1 O#/ %utOption "or a premium o" Rs. ,.

• #he lot si5e o" NI6#7 is ,.

• Hen&e' his a&&ount ill get &redited by Rs. ,.:,,?


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C0A/%*C Short Strangle$ontd.

• Case 1: At e(piry i" NI6#7 &loses at ,'then /r. 0 ill neither make pro)t nor loss. Hisnet &ash Ko ill be . :,=-1-,=>,?

•

Case 2: At e(piry i" NI6#7 &loses at ,,'then /r. 0 ill make a pro)t o" Rs. ,.:,,?

• Case 3: At e(piry i" NI6#7 &loses at ,@'

then /r. 0 ill neither make pro)ts nor losses.His net &ash Ko ill be . :1-,=-,=>,?


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Strategy %: Long Call&utter'y

C(planationJ

• A trader' ho is neutral in nature andbelie!es that there ill be !ery lo

!olatility i.e. e(pe&ts the market to remainrange bound' ill implement this strategy.

• #his strategy in!ol!es selling o" A#/ $allOptions' buying 1 I#/ $all Option 3 buying

1 O#/ $all Option o" the same e(piry date3 same underlying asset. #he dieren&ebeteen the strikes should be eFual.


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Strategy %: Long Call&utter'y

• I" the market remains range bound thenthis strategy ill start making pro)ts.

• I" the market mo!es out o" strike range

in either ay' then it ill start makingloss.

• #he loss generated ill also be &apped.

•Risk: *imited

• Reward: *imited


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$onstru&tion *ong $allButterKy

• Sell A#/ $all Options

• Buy 1 I#/ $all Option

•

But 1 O#/ $all Option


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C(ample *ong $all ButterKy

• Suppose that NI6#7 is trading at , le!els'/r. 0 thinks that there is lo !olatility in themarket and e(pe&ts it to stay beteen a&ertain range' then he ill implement the *ong$all ButterKy Strategy. He ill sell NI6#7, A#/ $all Options "or a premium o" Rs. 1>=' buy 1 NI6#7 ,1 I#/ $all Optionat a premium o"

• Rs. 14, 3 buy 1 NI6#7 ,2 O#/ $all Option ata premium o" Rs. ,,. #he net in!estment illonly be Rs.1. :1>=-14,=-,,=>,?


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• Suppose that NI6#7 is trading at ,' /r. 0implements the *ong $all ButterKy Strategy.

• A= He Sells NI6#7 , A#/ $all Options "or apremium o" Rs. 1>='

• B= Buys 1 NI6#7 ,1 I#/ $all Option "or apremium o" Rs. 14, 3

• $= Buys 1 NI6#7 ,2 O#/ $all Option "or apremium o" Rs. ,,.

• He ill get a &redit o" Rs. 1 :1>= -14,= < ,,= ,? sin&e he bought $allOptions.


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• Case 1: At e(piry i" the NI6#7 &loses at@8' then /r. 0 ill make a pro)t o" Rs.1. :14,=>,?

•

Case 2: At e(piry i" the NI6#7 &loses at,' then /r. 0 ill make a loss o" Rs.1,. :1-14,= < ,, - 1>=>,?

• Case 3: At e(piry i" the NI6#7 &loses at

,,' then /r. 0 ill make a pro)t o" Rs.1. :@-14,= < 2- 1=>= -,,=>,?


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Strategy (: Short Call&utter'y

C(planation

• #his strategy is opposite o" the *ong $all ButterKyStrategy' a trader e(pe&ts the market to remainrange bound in *ong $all ButterKy' but here he

e(pe&ts the market to mo!e beyond strikeboundaries in Short $all

• ButterKy. I" the trader is bullish on the marketLs!olatility' he ill implement this strategy. Here also

there should be eFual distan&e beteen the strikes.%ro)ts "rom this strategy are &apped.

• Risk: *imited

• Reward: *imited


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$onstru&tion Short $all ButterKy

• Buy A#/ $all Options

• Sell 1 I#/ $all Option

•

Sell 1 O#/ $all Option


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C(ample - Short $allButterKy

• Suppose that NI6#7 is trading at ,' /r. 0implements the Short $all ButterKy Strategy.

• A= He buys NI6#7 , A#/ $all Options "or

a premium o" Rs. 1>='• B= sells 1 NI6#7 ,1 I#/ $all Option "or a

premium o" Rs. 14, 3

• $= sells 1 NI6#7 ,2 O#/ $all Option "or a

premium o" Rs. ,,.• He ill get a &redit o" Rs. 1 :14,= < ,,=

1>=>,? sin&e he sold $all Options.


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• Case 1: At e(piry i" the NI6#7 &loses at@8' then /r. 0 ill make a pro)t o" Rs.1. :14,=>,?

•

Case 2: At e(piry i" the NI6#7 &loses at,' then /r. 0 ill make a loss o" Rs.1,. :1-14,= < ,, - 1>=>,?

• Case 3: At e(piry i" the NI6#7 &loses at

,,' then /r. 0 ill make a pro)t o" Rs.1. :@-14,= < 2- 1=>= -,,=>,?


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Strategy ): Long Put&utter'y

C(planation

• #he *ong %ut ButterKy is a neutral strategy herea trader ill be bearish on the !olatility i.e. hethinks the market ill ha!e sideays kind o"

mo!ement and ill not rally sharply in eitherdire&tion in the near "uture.

• #his strategy in!ol!es sale o" A#/ %ut Options'buy 1 I#/ and 1 O#/ %ut Option.

• #he risk and reard are limited.

• Risk: *imited

• Reward: *imited


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C(ample *ong %ut ButterKy

• Suppose NI6#7 is trading at , le!els. /r. 0 isbearish on !olatility and e(pe&ts the market to mo!esideays.

• He ill implement *ong %ut ButterKy Strategy. He ill

• A= sell to , A#/ %ut Options "or a premium o" Rs.G,'

• B= buys one ,1 NI6#7 O#/ %ut Option at a premiumo" Rs. , 3

•

$= goes long on one ,2 NI6#7 I#/ %ut Option at apremium o" Rs. 12,.

• His net in!estment ill be Rs. 9,. :G,>=-,-12,=>,?


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C(ample *ong %ut ButterKy

• Case 1: At e(piry i" NI6#7 &loses at ,'then /r. 0 ill make a loss o" Rs. 9,.:1-,= -G,=>= < 2-12,=>,?

•

Case 2: At e(piry i" NI6#7 &loses at ,'then /r. 0 ill make a pro)t o" Rs. @,.:G,>= - ,= < 1- 12,=>,?

• Case 3: At e(piry i" NI6#7 &loses at ,@'

then /r. 0 ill make a loss o" Rs. 9,In!estment !alue=. :G,>=- ,=-12,=>,?


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S * Sh


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Strategy *: Short Put&utter'y

• C(planation

• In Short %ut ButterKy strategy' a trader isneutral in nature and e(pe&ts the market

to remain range bound in the near "uture.• A trader ill buy A#/ %ut Options; sell 1

I#/ 3 1 O#/ %ut Options. Here risk andreturns both are limited.

• Risk: *imited

• Reward: *imited


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$onstru&tion

• Buy A#/ %ut Options

• Sell 1 I#/ %ut Option

• Sell 1 O#/ %ut Option


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C(ample

• Suppose NI6#7 is trading at , oddpoints. /r. 0 is bearish on !olatility ande(pe&ts the market to mo!e upards

gradually at a !ery slo pa&e.• He ill implement Short %ut ButterKy

Strategy. He ill buy to , A#/ %utOptions at a premium o" Rs. G,' sell one

,1 NI6#7 O#/ %ut Option "or a premiumo" Rs. , 3 shorts one ,2 NI6#7 I#/ %utOption "or a premium o" Rs. 12,.


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• Case 1: At e(piry i" NI6#7 &loses at ,le!el' then /r. 0 ill make a pro)t o" Rs.9,. :-G,=>= - 1- ,= - 2-

12,=>,?• Case 2: At e(piry i" NI6#7 &loses at ,

le!el' then /r. 0 ill make a loss o" Rs.@,. :,=-G,>=-1- 12,=>,?

• Case 3: At e(piry i" NI6#7 &loses at ,@le!el' then /r. 0 ill make a pro)t o" Rs.9,. :,= - G,>= < 12,=>,?


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Strap – +eutral Strategy

C(planation

• Strap Strategy is similar to *ong Straddle' the onlydieren&e is the Fuantity traded.

• A trader ill buy to $all Options and one %ut Options.

• In this strategy' a trader is !ery bullish on the marketand !olatility on upside but ants to hedge himsel" in&ase the sto&k doesnLt per"orm as per his e(pe&tations.

• #his strategy ill make more pro)ts &ompared to longstraddle sin&e he has bought &alls.

• Risk: *imited



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C(ample - Strap

• /r. 0 is bullish on NI6#7 and enters ina Strap Strategy.

• He buys to , NI6#7 A#/ $all

Options at a premium o" Rs. 1 andsimultaneously buys one , A#/%ut Option at a premium o" Rs. G,.

• His net in!estment ill be Rs. 1@,:1>= < G,=>,? 2 optionspremiums


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• Case 1: At e(piry i" NI6#7 &loses at @8'then /r. 0 ill make a pro)t o" Rs. 9,.:2-G,= < -=>,?

•

Case 2: At e(piry i" NI6#7 &loses at ,'then /r. 0 ill make a loss o" Rs. 1@,Cntire in!estment

• amount=. :-= < -G,=>,?

• Case 3: At e(piry i" NI6#7 &loses at ,@'then /r. 0 ill make a pro)t o" Rs. ,9,.:-1=>=-G,=>,?


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Strategy - Strip

!planation

• Strip Strategy is the opposite of !trap !trategy .Mhen a trader is bearish on the market and bullishon !olatility then he ill implement this strategy by

buying to A#/ %ut Options 3 one A#/ $all Option'o" the same strike pri&e' e(piry date 3 underlyingasset.

• I" the pri&es mo!e donards then this strategy illmake more pro)ts &ompared to short straddlebe&ause o" the double= Fuantity in!ol!ed.

• Risk: *imited



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C(ample Strap

• /r. 0 is bearish on NI6#7 and entersin a Strip Strategy' buys ,NI6#7 A#/ %ut Options at a premium

o" Rs. G,' buys 1 , A#/ $allOption at a premium o" Rs. 1. Hisnet in!estment ill be Rs. 12,

:G,>= < 1=>,?


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C(ample Strap - &ontd.

Case 1: At e(piry i" NI6#7 &loses at @8' then/r. 0 ill make a pro)t o" Rs. 14,. :2-G,=>= -

1=>,?Case 2: At e(piry i" NI6#7 &loses at ,' then/r. 0 ill make a loss o" Rs. 12, entirein!estment !alue=. :-G,=>= < -1=>,?

Case 3: At e(piry i" NI6#7 &loses at ,@' then/r. 0 ill make a loss o" Rs. 2,. :-1=- G,>=>,?


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Neutral Strategies - Options