Insurance, Collars & Other

Strategies
By: Hakeem Omar
Basic Insurance Strategy

Basic Insurance
Strategi

Selling
Long Position Short Position
Insurance

Covered
Writing Naked Writing

Covered Call Covered Put

Insurance a Long Position: Floors
• A put option is combine with a position in underlying asset (stock)
• We will have a long position in a assets. Benefit will be getting if the
price is incresing.
• If the price is decresing, we buy long put (act as insurance to the long
position of underlying asset).
• Formula:
Long Stock + Long Put
Floor (Payoff)
Combined Payoff
140

• Position: Long Stock + Long Put,

Example : � = 100,
120

100

Spot Price 70 80 90 100 110 120 130 80

Long Stock 70 80 90 100 110 120 130 60

Long Put 30 20 10 0 0 0 0 40

Combined 20
100 100 100 100 110 120 130
Payoff
0
70 80 90 100 110 120 130

• Long Stock + Long Put = Long Call

• +Stock + Put = + Call
 Floor (Profit)
Profit
25

• Position: Long Stock + Long Put, 20

Example :
� = 100, ���� = 110.76 15

Spot 10
70 80 90 100 110 120 130
Price
5
Long
70 80 90 100 110 120 130
Stock 0
70 80 90 100 110 120 130

Long Put 30 20 10 0 0 0 0 -5

Combine -10
100 100 100 100 110 120 130
d Payoff
-15
110.7 110.7 110.7 110.7 110.7 110.7 110.7
Cost
6 6 6 6 6 6 6

Profit -10.76 -10.76 -10.76 -10.76 -0.76 9.24 19.24

Insurance a Short Position: Caps
• We will have short position in an asset. We get benefit if the price is
going down (declining)
• If the price is incresing. It is advised to buy call.
• Formula:
Short Stock + Long Call
Caps (Payoff)
Combined Payoff
0

• Position: Short Stock + Long Call,

70 80 90 100 110 120 130

Example : � = 100, -20

-40
Spot Price 70 80 90 100 110 120 130
Short -60
-70 -80 -90 -100 -110 -120 -130
Stock
-80
Long Call 0 0 0 0 10 20 30
Combined -100
-70 -80 -90 -100 -100 -100 -100
Payoff
-120

• Short Stock + Long Call = Long Put

• -Stock + Call = + Put
 Caps (Profit)
Profit
-145

• Position: Short Stock + Long Call,

70 80 90 100 110 120 130
-150

Example : -155

� = 100, ���� = 93.24 -160

-165
Spot Price 70 80 90 100 110 120 130
-170
Short
-70 -80 -90 -100 -110 -120 -130
Stock -175

-180
Long Call 0 0 0 0 10 20 30
-185

Combined
-70 -80 -90 -100 -100 -100 -100 -190
Payoff
-195

Cost 93.24 93.24 93.24 93.24 93.24 93.24 93.24

Profit -163.24 -173.24 -183.24 -193.24 -193.24 -193.24 -193.24

Covered Writing
• Option writer has a long position in the underlying asset.
• Also known as option overwriting/ selling a covered call.
Covered Calls
• Option strategy where an invester who a long position in an asset and
sell call option on the same asset in an attemp tp generate increase
income from the assets.
• Also known as buy-write
• Strategy:
• Long Stock + Short Call
 Covered Call (Payoff)
Profit
10

• Position: Long Stock + Short Call,

Example :
5

� = 100, ���� = 93.24 0

Spot 70 80 90 100 110 120 130
70 80 90 100 110 120 130
Price -5

Long
70 80 90 100 110 120 130
Stock -10

Short Call 0 0 0 0 -10 -20 -30 -15

Combine
70 80 90 100 100 100 100 -20
d Payoff

Cost 93.24 93.24 93.24 93.24 93.24 93.24 93.24 -25

• Short Stock + Long Call = Long Put

Profit -23.24 -13.24 -3.24 6.76 6.76 6.76 6.76
• -Stock + Call = + Put
Covered Puts
• Short position of the stock and write a put at the same time

• Strategy:
• Short Stock + Short Put
 Covered Call (Payoff)
Profit
-165

• Position: Short Stock + Short Put,

70 80 90 100 110 120 130
-170

Example : -175

� = 100, ���� =− 110 -180

Spot Price 70 80 90 100 110 120 130 -185

Short -190
-70 -80 -90 -100 -110 -120 -130
Stock -195

Short Put 0 0 0 0 10 20 30 -200

Combined -205
-70 -80 -90 -100 -100 -100 -100
Payoff -210

Cost 110 110 110 110 110 110 110 -215

Profit -180 -190 -200 -210 -210 -210 -210