OPTIONS, FUTURES AND

OTHER DERIVATIVES
Lecture 2: Options Fundamentals and
trading strategies

Patrick PILCER
patrick@pilcer.fr
 Outline
• Options Fundamentals
Types of options
Positions, payoffs and PL
• Trading strategies
Speculating
Insurance strategies
Spreads and combinations

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Types of options
• European Call: a European call option gives its
holder the right to buy a certain asset at a certain date
for a certain price (the strike price)
• European Put: a European put option gives its
holder the right to sell a certain asset at a certain date
for a certain price
• The buyer of an option holds a right
• The seller of an option has an obligation (he forced to
sell (call) or to buy (put)

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American options

• An American option can be exercised at any time

during its life (early exercise), only once

• A bermudan option can be exercised at specific dates

(every Monday, every month…)

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 Positions
There are 4 basic types of option
position:
• Long call: you pay a premium today for the
right to buy the underlying in the future
• Long put: you pay a premium today for the
right to sell in the future
• Short call: you receive a premium today
against the possibility of having to sell in
the future
• Short put: you receive a premium today
against the possibility of having to buy in
the future

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 Call Position
Consider a European call option on
Total, current price S = 35, strike 40,
premium 5, maturity end of the March

The buyer of the call pays 5 and may

exercise the right to buy one share at
40 at the end of March

What if, at expiration, Total values

35 40 45 50
Draw the PL

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 PL for a buyer of a
European call

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 PL for a seller of a
European call

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 Put Position
Consider a European put option on
Total, current price S = 35, strike 30,
premium 5, maturity end of the March

The buyer of the put pays 5 and may

exercise the right to sell one share at
30 at the end of March

What if, at expiration, Total values

25 30 35 40
Draw the PL

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 PL for a buyer of a
European put

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 PL for a seller of a
European put

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 Positions and P/L
The 4 basic types of option position at
maturity:

• Long call: P/L = max (𝑺𝑻 − 𝐊; 𝟎) − 𝐜

• Long put: P/L = max (K - 𝑺𝑻 ; 𝟎) − 𝐩

• Short call: P/L = - max (𝑺𝑻 − 𝐊; 𝟎) + 𝐜

• Short put: P/L = - max (K - 𝑺𝑻 ; 𝟎) + 𝐩

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 Terminology
• Underlying asset: asset the holder of the option may
buy or sell

• Strike price: price at which the trade will occur (if ever)

• Expiration date or maturity

• Premium (can be in price or percent)

• At the money

• In the money

• Out of the money

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 Terminology

• Intrinsic Value

• Time Value (converges to 0 at expiration and when it is

optimal to exercise)

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 Use of options

• Speculating

• Protecting

• Combinations

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 Speculation

• Investing in stocks

• Investing in options

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 Protection
To insure a long position, an
investor can buy a put

If the stock at expiration is below the

strike, P/L = K – S°- premium

If the stock at expiration is above the

strike, P/L = S - S°- premium

… placing a floor on your portfolio

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 Improvement of income
Covered Call writing

You increase the income of your stock position

through the sale of calls

You receive the cash for selling the calls

If the stock at maturity is above the strike, you
must sell your stocks

You reduce your potential downside

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 Combination

You can combine calls and puts,

strikes…

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 Straddle
(long a call and a put with the same strike)

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 Strangle
(long a call and a put with different strikes)

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 Bull Spread
(long a call short an other call with a higher
strike)

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 Bear Spread
(short a call long a call with a higher strike)

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 Butterfly

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 Short Condor

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 Long Condor

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 Combination

You can combine calls and puts,

strikes…

…and generate any linear payoff

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