P1.T3.

Financial Markets & Products

Chapter 14. Trading Strategies

Bionic Turtle FRM Study Notes

Chapter 14. Trading Strategies
EXPLAIN THE MOTIVATION TO INITIATE A COVERED CALL OR A PROTECTIVE PUT STRATEGY. ......... 3
DESCRIBE PRINCIPAL PROTECTED NOTES (PPNS) AND EXPLAIN NECESSARY CONDITIONS TO
CREATE A PPN. ...................................................................................................................... 5
DESCRIBE THE USE AND CALCULATE THE PAYOFFS OF VARIOUS SPREAD STRATEGIES. ................ 6
DESCRIBE THE USE AND EXPLAIN THE PAYOFF FUNCTIONS OF COMBINATION STRATEGIES. ........ 12
CHAPTER SUMMARY ............................................................................................................. 15

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Chapter 14. Trading Strategies
Explain the motivation to initiate a covered call or a protective put strategy.

Describe principal protected notes (PPNs) and explain necessary conditions to create
a PPN.

Describe the use and calculate the payoffs of various spread strategies.

Describe the use and explain the payoff functions of combination strategies.

Explain the motivation to initiate a covered call or a protective put

strategy.
Covered Call
To “write a covered call” is to combine a long stock position with a short position in a
call option.

Writing a covered call = long stock + short call option = −

The rationale of the covered call is either:

 To cover the cost of the potential short call payoff with the stock: The long
stock position ‘‘covers’’ or protects the investor from the payoff required on the short
call when the stock price increases rapidly.
 To generate income via the sale of the short call: Writing a covered call is an
income strategy.
This trade reflects a neutral to bullish outlook.
 If the stock price increases modestly (assuming the strike exceeds the current price),
the covered call writer enjoys the interim capital appreciation supplemented by the
option premium. If the stock price hovers or rises modestly, this strategy can be
rolled over (e.g., buy to close original options and sell new options at higher
price/later expiration), generating a stream of income.
 If the stock increases significantly, the strike price will be breached, and the written
call option will be exercised such that the trade forfeits further profits. This strategy
enhances income but limits the upside.
 On the other hand, if the stock price decreases, then the option will not be exercised,
and the collected option premium provides a modest hedge to the stock's capital
depreciation. As Hull notes, put-call parity shows that the price exposure from writing
a covered call is the same as the exposure from writing a naked put.
IMPORTANT CONCEPT: If the payoff strategy for a covered call looks like a short put
option, that’s because it is! Remember the put-call parity: − = − . We can
infer from this that going long the stock and short a call is the same as going short a
put with the PV of the strike price in the bank. By knowing the intuition behind the
put-call parity, you can often reason your way to the answer!

The reverse of writing a covered call is a short position in a stock combined with a long
position in a call option. Its payoff resembles a long put. (Think about the payoff profile in
terms of the put-call parity).

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Protective Put
A protective put can be thought of as a form of insurance. The investment strategy
involves buying a European put option on a stock and the stock itself. Looking at the strategy
and the payoff, it looks like we have created a synthetic long call option! Again, the concept
of put-call parity comes in handy.

It is tempting to think that having protective puts on your portfolio and rolling them over at
maturity is a great way to benefit from the potential increase in the stock price while having
our losses capped. However, the premium paid and transaction costs incurred dilute the
profits from such a strategy, just like in the covered call. We can generalize this concept
further by noting that, after adjusting for risk, no one strategy offers an easy way to make
money in a [weak form] efficient market. There is no such thing as a free lunch.

IMPORTANT CONCEPT: While a covered call generates income (the short call option
premium) when the (long) stockholder does not expect further price appreciation on
the long position, the protective put forfeits some income (the long-put option
premium) in exchange for downside protection.

The reverse of a protective put is a short position in a put option combined with a short
position in the stock. Its payoff is similar to a short call. (Remember put-call parity!).

The graph below illustrates the profit for the above strategies. The assumptions are: stock
price = $20, option strike price= $20, call premium = $1.99, put premium = $1.20

Figure: Profit patterns for trading strategies involving an option and a stock

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Describe principal protected notes (PPNs) and explain necessary
conditions to create a PPN.
A principal protected note (PPN) is a financial product created using options that caters
mainly to conservative and retail investors. It is structured so that the investors benefit from
the returns made on the performance of the asset underlying the option. At the same time,
the principal amount invested is protected from the risk of losses. In other words, the
investor could take a risky position without risking the principal.

For instance, a PPN may be created by combing a zero-coupon bond and a call (put) option
if the investor expects the asset price to increase (decrease). Creating a PPN can be better
understood with an example.

Hull Example 12.1:1 A bank creates a PPN portfolio consisting of a (i) A 3-year zero-coupon
bond with a principal of $1,000 (ii) A 3-year at-the-money European call option on the stock
portfolio worth $1,000 providing a dividend yield of 1.5% per annum. The 3-year
continuously compounded interest rate is 6%.

The payoff from the bond is $1000, which is equal to the strike price of the option. The PPN
aims to preserve this principal of $1000. For this, the bank should make these investments:
 $835.27 (=1000e-0.06*3) should be invested on a zero-coupon bond yielding a par of
$1000 at 6% interest rate (continuously compounded) for 3 years.
 The difference between the principal and the amount invested in the bond, $164.73
=1000-835.27) can be invested in the ATM call option on the stock portfolio. (It can
be shown that if portfolio volatility is 15%, the option can be purchased for $164.73)
 Now, if the value of this portfolio increases, the investor makes a return on his
investment of $1000. However, if the portfolio value decreases, the option will expire
worthless, but the payoff from the bond yields $1000, thereby preserving the principal
amount invested.
In our example, PPN is possible because
 The investor is giving up three years of interest on the $1000 investment.
 The investor does not receive any dividend income for the next three years.
 In the worst-case scenario, even if interest and dividend income is lost, the principal
is still protected.

When portfolios yield an income, full participation PPNs in which the investor gets 100% of
the upside is possible.

According to put-call parity:2

p + S = c + Ke

As the call option is at-the-money (K = S ), put-call parity is:

c = p + S − S e
⇒ c > S0 − S0 e−rT

1
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.
2
Formulas retrieved from FRM Exam Part I: Financial Markets and Products, Ch 14: “Trading Strategies”,
GARP, Pearson Education Inc, 2020

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This proves that the call option always costs more than the funds available. (In our example,
the call will always cost more than $164.73). But if the stock portfolio provides sufficient
income, it reduces the cost of the call, and thus a PPN can be created.

The bank adds value by creating a PPN and selling it to the investor:
 For the investor: The bank creating the PPN does it to build the profit margins into
the product. In the case of the above example, the zero-coupon bond, along with the
call option, will cost the bank less than $1000. So, the PPN not only costs the
investor, but the investor also assumes the risk of default (i.e., the bank not paying
off the PPN at maturity). Therefore, it might look like the investor can do better if he
buys an option by himself and invests the rest of the money in a risk-free bond
instead of purchasing a PPN. However, the investor may be subject to wider bid-offer
spreads on the option and may earn lower interest rates than if the bank were
involved.
 For the bank: Creating and selling PPN’s would be feasible for the banks depending
on the level of interest rates and portfolio volatility. If the interest rates are low and
the volatility is high, the bank will have fewer funds than needed to buy the option.
So, it may not be feasible to create a PPN in such cases. Instead, the bank may try
to create a feasible product case by increasing the maturity of the instrument. Also, in
our example, the higher the dividend yield, the more profitable the PPN will be to the
bank (as it costs less for the call option on a stock paying dividends).

Describe the use and calculate the payoffs of various spread

strategies.
A spread strategy is a position with two or more options of the same type, i.e., two or
more calls or two or more puts.3
Bull spread (type of vertical spread)
A bull spread is formed by purchasing a European call option on a stock with a lower strike
price and selling a European call option on the same stock with a higher strike price.3 Bull
spreads can also be created by buying a European put with a low strike price and selling a
European put with a high strike price.
 In both call and put bull spreads, we are bullish, as the name implies, and thus
expect the underlying price to increase.
 Since the call price declines as the strike price rises, the sold option’s value is
smaller than the purchased option’s value. A bull spread produced from calls involves
an opening investment or a cash outflow. Conversely, for a bull spread created using
put options, there is always a cash inflow.
 The bull spread strategy limits the investor’s upside as well as downside risk. For
example, in a bull spread using call options, the investor gets the income (premium)
from selling the option with a higher strike price for forgoing the potential returns on
the upside.

3
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

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Payoff: For a call bull spread, if K is the strike price of the long call option and K is the
strike price of the call option sold where K > K , and S is the stock price at option
expiration, then:4
 If S is larger than the greater strike price(K ), the difference between the strike
prices, K − K , is the payoff.
 If S is between the strike prices, the payoff is S − K
 If S is lower than the smaller strike price(K ), the payoff is zero.

Unlike bull spreads created from calls, bull spreads from puts have a negative or zero payoff.

Hull Example 12.2:4 An investor buys a 3-month European call with a strike price of $30
and for $3 and sells a 3-month European call with a strike price of $35 for $1.
 The cost of the strategy is $2(=3-1).
 The payoff is $5 (=35-30) if the stock price is above $35; The payoff is $0 if the stock
price below $30; If the stock price is between $30 and $35, the payoff is the amount
by which the stock price exceeds the lower strike price (=S − K )
 The profit is the payoff less the cost. If the stock price is ≤ $30, the profit is -$2(=0-2);
if the stock price is ≥ $30, the profit is $3 (=5-2); if the stock price is between $30 and
$35, then the profit is S − 32 (=S -30-2)

The graphs below illustrate profits from bull spreads with call and puts. Assumptions are:
 Bull spread with calls: Here, the long call has a strike (K ) = $18, with a premium =
$3.51 while short call has a higher strike(K ) = $22 and a premium = $1.53 on the
same stock priced at $20, with the same 1-year maturity.
 Bull spread with puts: Here, the long put has a strike (K ) = $19, with a premium =
$1.15 while short put has a higher strike(K ) = $22, with a premium = $2.26 on the
same stock priced at $20, with the same 1-year maturity.

4
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

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Bear spread (type of vertical spread)
A bear spread is formed by purchasing a European put with a higher strike price and selling
a European put with a lower strike price on the same underlying stock. It is important to note
that we can create a bear spread using call options also.
 An investor who expects the stock price to increase enters into a bull spread. By
contrast, in the case of either a put or call bear spread, investors are bearish, as the
name implies, and thus expect the underlying stock’s price to decline.
 A bear spread produced from puts leads to a cash outflow, as the price of the put
sold is lower than the price of the put bought, whereas a bear spread from calls has a
cash inflow.
 Like bull spreads, bear spreads limit both the upside profit potential and the downside
risk. For example, in a put bear spread, the investor buys a put with a higher strike
price and sells a put with a lower strike price, thereby sacrificing some of the profit
potential to get the price of the option sold.

Payoff: For a put bull spread, if K is the strike price of the long put option and K is the
strike price of the short put option where (K < K ), and S is the stock price at option
expiration, then5
 If S is greater than K , the payoff is zero
 If S is less than K , the payoff is K − K
 If the stock price is between K and K , the payoff is K − S

Hull Example 12.3:5 An investor buys a 3-month European put with a strike price of $35 for
$3 and sells a 3-month European put with a strike price of $30 for $1.
 The payoff from this bear spread strategy is zero if the stock price is above $35 and
$5 if it is below $30. If the stock price is between $30 and $35, the payoff is 35 − S .
 The options cost $2(=3-1) upfront.
 The profit is calculated by subtracting this initial cost from the payoff. If the stock
price is ≤ $30, the profit is $3 (=5-2); if the stock price is ≥ $35, the profit is -$2 (=0-2);
if the stock price is between $30 and $35, then the profit is 33−S = (35 − 2 − S )

The graphs below illustrate profits from bear spreads with puts and calls. Assumptions are:
 Bear spread with puts: Here, the long put has a strike (K ) = $22, with a premium =
$2.66 while short put has a lower strike(K ) = $19, with a premium = $1.15 on the
same stock priced at $20, with the same 1-year maturity.
 Bear spread with calls: Here, the long call has a strike (K ) = $22, with a premium =
$1.53 while short call has a lower strike(K ) = $18, with a premium = $3.51 on the
same stock priced at $20, with the same 1-year maturity.

As the graph below shows, we have a range of possible payoff scenarios. However, our loss
is capped at $0 (excluding the premium), while our gain is capped at K − K (excluding the
premium).

5
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

8
Box Spreads
A box spread strategy combines a bull call spread with strike prices K and K and a bear
put spread with the identical two strike prices.
 The box spread payoff is always K − K .
 The spread value is the current value of this payoff or (K − K )e . A value different
from this would give rise to an arbitrage opportunity.
CONCEPT: “A box spread arbitrage only works with European options”6 (Hull)

Butterfly spread (sideways strategy)

A butterfly spread strategy combines positions in options with three strike prices. It can be
produced using either call or put options.
 For example, it may combine buying a European call option at a lower strike price K ,
purchasing a European call option with a higher strike price K and selling two
European call options at strike price K which is priced midway between K and K .
K is usually nearer to the present stock price.
 This strategy creates a gain if the stock price remains nearer to K but leads to a
slight loss if there is considerable stock price movement in any direction. So, it mainly
benefits investors that do not expect large moves in stock prices. It involves a small
initial outlay.

Payoff:
 If the stock price at expiration (S ) is less than K or greater than K , payoff is zero.
 If the stock price is between K and K , the payoff is S − K
 If the stock price is between K and K , the payoff is K − S

6
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

9
Example:7 A stock is currently priced at $61. An investor who does not expect large price
movements in 6 months creates a butterfly spread by buying one call priced $10 with a $55
strike price, buying one call priced $7 with a $65 strike price, and selling two calls priced $5
with a $60 strike price. Calculate the payoff and profits from this strategy.
 It costs 10 + $5 – (2 × 5) =$1 for this spread.
 If the stock price in 6 months is greater than $65 or less than $55, the payoff is zero,
and the net loss is the cost of this strategy, i.e., $1.
 If the stock price is between $56 and $64, a profit is made. The maximum profit, $4,
(=K − S − cost = 65 − 60 − 1) occurs when the stock price in 6 months is $60.

In this graph below depicting the butterfly spread, the assumptions are: Long call with
strike K =$18, premium = $3.21, long call with strike K =$22, premium = $1.13 short two
calls with strike K =$20, premium = $1.99.

Why the butterfly? The investor expects low volatility (range-bound) and wants to cap the
risk.

Calendar spread

In a calendar spread, options have the identical strike price but distinct dates of expiration.
The calendar spread can be produced with calls or puts:
o Two calls: The investor sells a call option with a specific strike price and buys a
call option with the same strike price but with a longer term to maturity.
o Two puts: The investor sells a short-maturity put option and buys a long-
maturity put option with the equivalent strike price.
 An option is generally more expensive the longer the maturity is. A calendar spread
typically involves a primary investment.

7
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

10
  In a neutral calendar spread, the strike price selected is close to the current stock
price. A higher strike price is chosen for a bullish calendar spread, and for a bearish
calendar spread, a lower strike price is chosen.
 If at expiration the stock price of the short-maturity option is close to the strike price
of the short-maturity option, the investor makes a profit. However, a loss occurs when
the stock price is much higher or lower than this strike price. So, it is comparable to a
butterfly spread.
 When an investor purchases a short-maturity option and sells a long-maturity option,
this is a reverse calendar spread. A slight profit arises if the stock price at expiration
of the short-maturity option is much higher or lower than the strike price of the short-
maturity option. However, a loss is experienced if the stock price is close to the strike
price.

Payoff: The payoff for a calendar spread is as outlined below.

 If the stock price at expiration (S ) is exceptionally small, the short-maturity option
will expire without value, and the price of the long-maturity option is near zero. The
loss is, therefore, the price of establishing the spread at the start.
 When S is exceptionally high, the cost of the short maturity option is S − K and
long-maturity option is close to S − K. Then the net loss is near to the price of
establishing the spread initially.
 If S is close to K, the investor’s cost of the short-maturity option is much less, but the
long-maturity option has good value. So a net gain can be made.

We illustrate the calendar spread in this graph below. Assumptions are:

 Short call with 1 year to maturity, premium = $1.99 and Long call with 1.25 year to
maturity, premium = $2.27, and both with a strike price of $20.
 Short put with 1 year to maturity, premium = $1.20 + Long put with 1.25 year to
maturity, premium = $1.29, and both with a strike price of $20.

Diagonal spread
With a diagonal spread, the date of expiration and the strike price of the calls are distinct.
So, a series of profit patterns are possible.

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Describe the use and explain the payoff functions of combination
strategies.
A combination strategy requires taking on a position in call(s) and put(s) on the
identical stock.
Straddle
To straddle is to buy or sell a call and a put on the same stock with the same strike price
and expiration date. In what is called a straddle purchase (bottom straddle), the investor
buys a call and put with the same strike price and expiration date.

A straddle write (top straddle) is the reverse of this position, which is created by selling a
call and a put with the identical exercise price and date of expiration.

 Why the bottom straddle? This is suitable for investors expecting a large move in a
stock price in either direction (i.e., the direction of the move cannot be clearly
anticipated). The worst-case scenario is that the stock settles at the strike price: the
investor has paid two premiums but does not receive any payoffs.
 Why the top straddle? The investor is highly confident that the stock will not stray
from the strike price in either direction. If the stock price equals the strike price, the
investor has collected two premiums for profit. However, this is a very risky strategy
because the potential loss from a large move in the stock price in either direction is
unlimited. A top straddle is also a direction neutral volatility strategy; however, unlike
with the bottom straddle, we want little to no movement in the underlying.

Payoff
 If the stock price at expiry (S ), is less than the strike price (K), the payoff is K − S
 If the stock price at expiry is greater than the strike price, the payoff is S − K

Example:8 Consider a stock currently priced at $69 whose price is expected to increase in
the future. An investor creates a straddle by buying both a put and a call with a strike price of
$70, expiring in 3 months. The call costs $4, and the put costs $3.
 The initial outlay for the strategy is $7 (=4+3).
 If the stock price stays close to the strike price, a loss is incurred, but it is limited.
E.g., if the stock remains at $70, the loss is limited to the initial cost of the strategy
($7). This is the worst that can happen.
 A large move in either direction leads to profits. E.g., if the stock price is higher at
$90, a profit of $13 is made; if the stock moves down to $55, a profit of $8 is made.

The figure below illustrates:

 a bottom straddle consisting of a long call with a premium = $1.99 and a long put with
a premium = $1.20, both with a strike price of $20.
 a top straddle consisting of a short call with a premium = $1.99 and a short put with a
premium =$1.20, both with a strike price of $20.

8
Hull, C. John, “Options, Futures and Other Derivatives”, Ch: 12, “Trading Strategies involving options”, 10th
Edition, Pearson, 2018.

12
IMPORTANT CONCEPT: A straddle is a direction neutral volatility strategy: we don't
mind the way in which the underlying moves. In the case of a bottom straddle, as long
as the price moves sufficiently, we are indifferent to which way it moves. Conversely,
for a top straddle, we want the price to deviate from the strike as little as possible.

Strips and Straps

Strips consist of a long position in one call and two puts with identical and strike price and
date of expiration. Straps comprise a long position in two calls and one put with identical
strike price and expiration date.
 Why the strip? Investors wager on a large stock price shift but believe a decrease is
more probable than an upturn.
 Why the strap? Like the strip, the investor bets on a large stock price movement but
instead considers an increase more likely. So, a strap is also similar to a straddle, but
here, we are biased upwards.

This strip illustrated below consists of a long call with a premium = $1.99 plus two long puts
priced at $1.20, all with a strike price of $20 and time to expiration of one year.

The graph related to the strap consists of two long calls, priced at $1.99 plus a long put with
a premium of $1.20, all with a strike price of $20, and time to expiration of one year.

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Strangle
In a strangle (also known as bottom vertical combination), investors purchase a put and
a call with the identical date of expiration and distinct strike prices. The call strike price is
greater than the put strike price.

The sale of a strangle where an investor sells a put and a call with the same expiration
date and different strike prices is also referred to as a top vertical combination.

 Why the strangle? Investors are expecting a sizeable price change but are unclear
on the direction of the move. A strangle is similar to a straddle but cheaper to install;
however, this comes at the cost of requiring more extreme price movements than
with the straddle. Consequently, this is a strategy that is bullish on volatility.
 Why write a strangle? Strangle writing is suitable for investors who think that
sizable stock price moves are improbable. This approach is risky and may lead to an
infinite probable loss.

Payoff: The profit pattern obtained with a strangle depends on how close together the strike
prices are. If strike prices are far apart, the lesser the downside risk, but the stock price has
to move further to profit.
 If the stock price at expiration (S ) is less than the put strike price (K ), the payoff is
K −S
 If the stock price at expiration (S ) is greater than the call strike price (K ), the
payoff is S − K
 If the stock price at expiration is between the call and put strike price, the payoff is
zero.

The illustrated graphs show a:

 strangle consisting of a long call with strike = $18, premium = $3.21 plus a long put
with strike =$22, premium = $2.27.
 strangle write consisting of a short call with strike = $18, premium=3.21$ plus a short
out with strike =$22, premium = $2.27

14
Chapter Summary
A principal-protected note is a financial instrument created from a zero-coupon bond and a
European call (or put) option. It is structured so that under favorable conditions, the investors
benefit from the returns made on the execution of the asset underlying the option. Still, even
in the worst-case scenario, although there may be no returns from underlying, the principal
invested is protected from losses.

The options strategies we have seen are but a few of the many that are used on a daily
basis. However, they form the basis of many such strategies.
 That is, a combination of the strategies we have reviewed can be used to construct
any options strategy - your imagination (and wallet) is the limit.
 It is important to note that, while several of the strategies seem to lock in a
guaranteed profit or have a seemingly high probability of making money, this is
largely an illusion due to the transaction costs involved - the spread between the bid
and the ask price observed in the market.
 We can generalize this further: typically, only when your expectations differ from that
of the market will there be a genuine money-making opportunity. However, going
against the market can pose a significant risk as options enable you to leverage your
positions in a way that regular stocks and bonds do not. That being said, there are
many scenarios in which putting on any of the aforementioned options strategies
would make sense.
 We would want to do this to hedge our risk, and the secondary reason is that we
simply hold a different view than the market and are making an informed bet.
Investment banks are typically more than willing to act as market makers as, on
average, they end up with a net profit due to this sort of market-making.
To “write a covered call” is to combine a long stock position with a short position in a call
option. A protective put is buying a put option on a stock along with buying the stock itself.

To summarize spreads: It is a position with two or more options of the same type, i.e., two
or more calls or two or more puts.
 In the case of bull and bear spreads, the options have the same expiration date but
different strike prices.
o A bull spread is produced by purchasing a call (or put) option on a stock with a
lower strike price and selling a call (or put) option on the same stock with a
higher strike price.
o A bear spread is produced by purchasing a put (or call) with a higher strike
price and selling a put (or call) with a lower strike price on the same underlying
stock.
 Box spread combines a bull call with a bear put.
 A butterfly spread combines positions in options with three different strike prices
created from either calls or puts. This may involve purchasing calls (puts) with a low
and high strike price and selling two calls (puts) with some intermediary strike price.
 In calendar spreads, the options have the same strike price but different expiration
dates, i.e., selling a short-term call (put) and purchasing a long-term call (put).
 Diagonal spreads involve a long position in one option and a short position in
another such that the expiration date and the strike price of the options are different.

15
To summarize combinations: It involves accepting a position in both calls and puts on the
identical stock.
 In a straddle, the strategy is to buy (or sell) a call and a put on the identical stock
with an identical strike price and date of expiration.
 Strip involves a long position in one call and two puts with identical strike price and
date of expiration.
 Strap involves a long position in two calls, and one put with an identical strike price
and expiration date.
 In a strangle, the strategy is to buy (or sell) a call and a put with the same expiration
date and distinct strike prices.
After reading this chapter (and completing the accompanying exercises in the separate
PDF), you should be able to define and calculate the payoff of a covered call, protective put,
spread, and combination strategies. You should also be able to specify under what
circumstances each of these strategies would be appropriate to put on. You should know
which strategies are direction neutral with respect to a risk factor and which ones are not.

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