SlideShare a Scribd company logo
1 of 15
Money spreads,[object Object],Different strategies to hedge your risk using put or calls,[object Object]
The basics,[object Object],A spread is a strategy in which you buy one option and sell another option that is identical to the first in all respects except either exercise price or time to expiration.,[object Object],Our focus is on money spreads, which are spreads in which the two options differ only by exercise price.,[object Object],The investor buys an option with a given expiration and exercise price and sells an option with the same expiration but a different exercise price.,[object Object]
Bull Spreads,[object Object],Long Call,[object Object],Short Call,[object Object],Lower Exercise Price,[object Object],Higher Exercise Price,[object Object],It is designed to make money when the market goes up.,[object Object],In this strategy we combine a long position in a call with one exercise price and a short position in a call with a higher exercise price,[object Object]
Bull Spread,[object Object],The profit you will make from a bull spread is calculated by finding the value of the spread at a certain strike price less the initial value of the spread.,[object Object],Profit = Vt – V0,[object Object],Thus therefore the profit occurs on the upside,[object Object],Vt = Max(0, St – X1) – Max(0, St – X2),[object Object],V0 = c1 – c2,[object Object],Therefore,[object Object],П = Max(0, St – X1) – Max(0, St – X2) - c1 + c2,[object Object],Maximum Gain,[object Object],X2 – X1 – c1 + c2,[object Object],Breakeven point,[object Object],St* = X1 + c1 – c2,[object Object]
Bull Spread,[object Object],SaT,[object Object],SbT,[object Object],ScT,[object Object],X2,[object Object],X1,[object Object],[object Object]
 The exercise price, X2, you have a short position in, thus you wrote this option receiving c2.
 Important that to remember that a call option with a lower exercise price is more expensive than a call option with a higher exercise price, therefore you pay more for the long call than you receive for the short call.
 Thus you will have a negative starting value.,[object Object]
Bear Spreads,[object Object],Short Put,[object Object],Long Put,[object Object],Lower Exercise Price,[object Object],Higher Exercise Price,[object Object],There is another method to a Bear Spreads.,[object Object],Instead of using calls you use puts instead.,[object Object],You buy the put with the higher exercise price and sell the put with the lower exercise price.,[object Object]
Bear Spread,[object Object],The profit you will make from a bear spread is calculated by finding the value of the spread at a certain strike price less the initial value of the spread.,[object Object],Profit = Vt – V0,[object Object],Thus therefore the profit occurs on the downside,[object Object],Vt = Max(0,X2 – St) – Max(0, X1 – St),[object Object],V0 = p2 – p1,[object Object],Therefore,[object Object],П = Max(0,X2 – St) – Max(0, X1 – St) – p2 + p1,[object Object],Maximum Gain,[object Object],X2 – X1 – c1 + c2,[object Object],Breakeven point,[object Object],St* = X2 + c1 – c2,[object Object]
Bear Spread,[object Object],SaT,[object Object],SbT,[object Object],ScT,[object Object],X2,[object Object],X1,[object Object],[object Object]
 The exercise price, X2, you have a long position in, thus you bought this option paying p2.
 Important that to remember that a put option with a higher exercise price is more expensive than a put option with a lower exercise price, therefore you pay more for the short put than you receive for the long put.
 Thus you will have a negative starting value.,[object Object]
Butterfly Spread,[object Object],The profit you will make from a butterfly spread is calculated by finding the value of the spread at a certain strike price less the initial value of the spread.,[object Object],Profit = Vt – V0,[object Object],Thus therefore the profit occurs on the in the middle range, and the loss is either on the downside or the upside.,[object Object],Vt = Max(0, St – X1) – 2Max(0, St – X2) – Max(0, St – X3),[object Object],V0 = c1 – 2c2 + c3,[object Object],Therefore,[object Object],П = Max(0, St – X1) – 2Max(0, St – X2) – Max(0, St –  X3) – c1 + 2c2 – c3,[object Object]

More Related Content

Viewers also liked

1 hrly gs ch 01 solar system part 2
1 hrly gs ch 01 solar system part 21 hrly gs ch 01 solar system part 2
1 hrly gs ch 01 solar system part 2azmatmengal
 
2hrly gs ch p personality
2hrly gs ch p personality2hrly gs ch p personality
2hrly gs ch p personalityazmatmengal
 
2 hrly gs ch 08 vertebrates part 1
2 hrly gs ch 08 vertebrates part 12 hrly gs ch 08 vertebrates part 1
2 hrly gs ch 08 vertebrates part 1azmatmengal
 
Final gs ch p smoking
Final gs ch p smokingFinal gs ch p smoking
Final gs ch p smokingazmatmengal
 
2 hrly gs ch p psychological issues and youth amber alitaf shaikh
2 hrly gs ch p psychological issues and youth   amber alitaf shaikh2 hrly gs ch p psychological issues and youth   amber alitaf shaikh
2 hrly gs ch p psychological issues and youth amber alitaf shaikhazmatmengal
 
Final gs ch p dreams
Final gs ch p dreamsFinal gs ch p dreams
Final gs ch p dreamsazmatmengal
 
2hrly gs ch p facts about human skeleton
2hrly gs ch p facts about human skeleton2hrly gs ch p facts about human skeleton
2hrly gs ch p facts about human skeletonazmatmengal
 
2 hrly gs ch 08 vertebrates part 2
2 hrly gs ch 08 vertebrates part 22 hrly gs ch 08 vertebrates part 2
2 hrly gs ch 08 vertebrates part 2azmatmengal
 
Based on a scientific tradition
Based on a scientific traditionBased on a scientific tradition
Based on a scientific traditionazmatmengal
 
2hrly gs ch p perception
2hrly gs ch p perception2hrly gs ch p perception
2hrly gs ch p perceptionazmatmengal
 
Unit Trusts Mesurements(Aangepas)
Unit Trusts Mesurements(Aangepas)Unit Trusts Mesurements(Aangepas)
Unit Trusts Mesurements(Aangepas)vissie101
 
Final gs ch p negative effects of technology on human's wildlife
Final gs ch p negative effects of technology on human's wildlifeFinal gs ch p negative effects of technology on human's wildlife
Final gs ch p negative effects of technology on human's wildlifeazmatmengal
 
Organizations As Political Systems
Organizations As Political SystemsOrganizations As Political Systems
Organizations As Political Systemsvissie101
 
Open systems theory
Open systems theoryOpen systems theory
Open systems theoryEds Esteban
 
Open System Models
Open System ModelsOpen System Models
Open System Modelsvissie101
 
Indices(Aangepas)
Indices(Aangepas)Indices(Aangepas)
Indices(Aangepas)vissie101
 
Change Management PPT Slides
Change Management PPT SlidesChange Management PPT Slides
Change Management PPT SlidesYodhia Antariksa
 

Viewers also liked (19)

1 hrly gs ch 01 solar system part 2
1 hrly gs ch 01 solar system part 21 hrly gs ch 01 solar system part 2
1 hrly gs ch 01 solar system part 2
 
2hrly gs ch p personality
2hrly gs ch p personality2hrly gs ch p personality
2hrly gs ch p personality
 
2 hrly gs ch 08 vertebrates part 1
2 hrly gs ch 08 vertebrates part 12 hrly gs ch 08 vertebrates part 1
2 hrly gs ch 08 vertebrates part 1
 
Final gs ch p smoking
Final gs ch p smokingFinal gs ch p smoking
Final gs ch p smoking
 
2 hrly gs ch p psychological issues and youth amber alitaf shaikh
2 hrly gs ch p psychological issues and youth   amber alitaf shaikh2 hrly gs ch p psychological issues and youth   amber alitaf shaikh
2 hrly gs ch p psychological issues and youth amber alitaf shaikh
 
Final gs ch p dreams
Final gs ch p dreamsFinal gs ch p dreams
Final gs ch p dreams
 
report
reportreport
report
 
2hrly gs ch p facts about human skeleton
2hrly gs ch p facts about human skeleton2hrly gs ch p facts about human skeleton
2hrly gs ch p facts about human skeleton
 
2 hrly gs ch 08 vertebrates part 2
2 hrly gs ch 08 vertebrates part 22 hrly gs ch 08 vertebrates part 2
2 hrly gs ch 08 vertebrates part 2
 
Based on a scientific tradition
Based on a scientific traditionBased on a scientific tradition
Based on a scientific tradition
 
2hrly gs ch p perception
2hrly gs ch p perception2hrly gs ch p perception
2hrly gs ch p perception
 
Unit Trusts Mesurements(Aangepas)
Unit Trusts Mesurements(Aangepas)Unit Trusts Mesurements(Aangepas)
Unit Trusts Mesurements(Aangepas)
 
Final gs ch p negative effects of technology on human's wildlife
Final gs ch p negative effects of technology on human's wildlifeFinal gs ch p negative effects of technology on human's wildlife
Final gs ch p negative effects of technology on human's wildlife
 
Leading change
Leading changeLeading change
Leading change
 
Organizations As Political Systems
Organizations As Political SystemsOrganizations As Political Systems
Organizations As Political Systems
 
Open systems theory
Open systems theoryOpen systems theory
Open systems theory
 
Open System Models
Open System ModelsOpen System Models
Open System Models
 
Indices(Aangepas)
Indices(Aangepas)Indices(Aangepas)
Indices(Aangepas)
 
Change Management PPT Slides
Change Management PPT SlidesChange Management PPT Slides
Change Management PPT Slides
 

Similar to Money Spreads

Similar to Money Spreads (20)

Ifm derivatives 01[1].03.07
Ifm   derivatives 01[1].03.07Ifm   derivatives 01[1].03.07
Ifm derivatives 01[1].03.07
 
Session_Option Strategy.ppt
Session_Option Strategy.pptSession_Option Strategy.ppt
Session_Option Strategy.ppt
 
Options
OptionsOptions
Options
 
Lecture no 45 modified call butterfly
Lecture no 45   modified call butterflyLecture no 45   modified call butterfly
Lecture no 45 modified call butterfly
 
put call parity
put call parity put call parity
put call parity
 
A Quantitative Case Study on the Impact of Transaction Cost in High-Frequency...
A Quantitative Case Study on the Impact of Transaction Cost in High-Frequency...A Quantitative Case Study on the Impact of Transaction Cost in High-Frequency...
A Quantitative Case Study on the Impact of Transaction Cost in High-Frequency...
 
Option Strategies
Option StrategiesOption Strategies
Option Strategies
 
Swap
SwapSwap
Swap
 
Derivatives Primer
Derivatives PrimerDerivatives Primer
Derivatives Primer
 
Future forward and option
Future forward and optionFuture forward and option
Future forward and option
 
Options Trading Strategies
Options Trading StrategiesOptions Trading Strategies
Options Trading Strategies
 
Lecture no 42 long put butterfly
Lecture no 42   long put butterflyLecture no 42   long put butterfly
Lecture no 42 long put butterfly
 
Derivatives-Overview.ppt
Derivatives-Overview.pptDerivatives-Overview.ppt
Derivatives-Overview.ppt
 
Unit principles of option pricing call
Unit  principles of option pricing callUnit  principles of option pricing call
Unit principles of option pricing call
 
Lecture no 23 bull call ladder
Lecture no 23  bull call ladderLecture no 23  bull call ladder
Lecture no 23 bull call ladder
 
Lecture no 23 bull call ladder
Lecture no 23  bull call ladderLecture no 23  bull call ladder
Lecture no 23 bull call ladder
 
Lecture no 46 modified put butterfly
Lecture no 46   modified put butterflyLecture no 46   modified put butterfly
Lecture no 46 modified put butterfly
 
About Options
About OptionsAbout Options
About Options
 
Option strategies part iii
Option strategies  part iiiOption strategies  part iii
Option strategies part iii
 
Chap 14
Chap 14Chap 14
Chap 14
 

Money Spreads

  • 1.
  • 2.
  • 3.
  • 4.
  • 5.
  • 6. The exercise price, X2, you have a short position in, thus you wrote this option receiving c2.
  • 7. Important that to remember that a call option with a lower exercise price is more expensive than a call option with a higher exercise price, therefore you pay more for the long call than you receive for the short call.
  • 8.
  • 9.
  • 10.
  • 11.
  • 12. The exercise price, X2, you have a long position in, thus you bought this option paying p2.
  • 13. Important that to remember that a put option with a higher exercise price is more expensive than a put option with a lower exercise price, therefore you pay more for the short put than you receive for the long put.
  • 14.
  • 15.
  • 16.
  • 17.
  • 19. We sold two calls with exercise price
  • 20. X2
  • 21. If St is below X1
  • 23. If St is at least X2
  • 24. Profit limted to a certain amount
  • 25. If both options out-of-the-money
  • 26.
  • 27.
  • 28. Recall that the intial value of the spread (V0) is and put-call parity:
  • 29. Vo = c1 – 2c2 + c3
  • 30. c = p + S – X/(1 + r)T
  • 31. By using the appropriatesubscripts and subsitutes with the put-call parity, we obtain :
  • 32. Vo = p1 – 2p2 + p3
  • 33. The positive signs at p1 and p3 means that we should buy the puts with exercise prices of X1 and X3 and sell two puts with exercise price X2
  • 34. In effect we will be buying a bear spread and also selling a bear spread
  • 35. But if the options are priced correctly, it does not matter wheter we use put or calls