WELCOME TO THE PRESENTATION ON OPTION STRATEGIES.

TRADING STRATEGIES OF OPTIONS.

Options are used in combination to benefit from unpredictable movement in the prices of underlying assets. Certain combinations which are called option strategies are listed below.

STRADDLE: Buy/Sell call & put having same expiry at same strike price near So. STRANGLE: Buy/Sell call at higher X & Buy/Sell put at lower X having same expiry. STRAP: Long on 2 calls & 1 put having same expiry near So. STRIP: Long on 1 call & 2 puts having same expiry near So.
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BULLISH VERTICLE SPREAD: Buy an option with lower X & sell that option with higher X having same expiry. BEARISH VERTICLE SPREAD: Buy an option with higher X & sell that option with lower X. BOX SPREAD: It is a combination of bull & bear spreads with calls & puts respectively with the same set of X. It involves Buying call at lower X, selling call at higher X, buying put at higher X and selling put at lower X. TIME SPREAD: Buy/Sell long term option & sell/buy short term option having same X near So.
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BUTTERFLY SPREAD: Buy/Sell one option each at two extreme X & sell/buy two of the same option at intermediate X having same expiry. CONDOR SPREAD: Buy/Sell one option each at two extreme prices & sell/buy the same option at two intermediate X. PROTECTIVE PUT: Buy put along with buying stock to hedge for down side risk in buying stock. COVERED CALL WRITING: Buy stock & sell call.

LONG BUTTERFLY SPREAD:

Buy one option each at two extreme X & sell two of the same option at intermediate X and all of them having same expiry. Suppose we have: Nifty Put prem. Rs. 155.00 for X 2600, Nifty Put prem. Rs. 195.00 for X 2700 & Nifty Put prem. Rs. 240.00 for X 2800. Buying one put each at X of 2600 & 2800 & selling two puts at X 2700 we get net outflow of prem. (155+195*2-240) = Rs. (5)
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Payoff table
So on Expiry Buy put 2600 Buy Put 2800 Sell 2 Puts 2700 Premium Net Payoff

2400
2500 2600

200
100 -

400
300 200

(600)
(400) (200)

(5)
(5) (5)

(5)
(5) (5)

2605
2700 2795 2800 2900 3000

195
100 5 -

(190)
-

(5)
(5) (5) (5) (5) (5)

0
95 0 (5) (5) (5)6

OBSERVATION: Lower BEP = Lowest X + net premium. Upper BEP = Highest X net premium. Maximum loss limited to net premium when market is volatile. Maximum profit is Rs. 95 when market is stable.

SHORT BUTTERFLY SPREAD:

Sell one option each at two extreme X & buy two of the same option at intermediate X. Suppose we have: Nifty 2600 call priced at Rs. 270.00, Nifty 2700 call priced at Rs. 215.00 & Nifty 2800 call priced at Rs. 160.00. Selling one call each at 2600 & 2800 & buying two calls at 2700 we get net inflow of premium (280210*2+170) = Rs. 30.
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Payoff table
So on Expiry Sell call 2600 Sell call 2800 Buy 2 calls 2700 Premium Net Payoff

2400
2500

30
30

30
30

2600
2630

(30)

30
30

30
0

2700
2770 2800 2900 3000

(100)
(170) (200) (300) (400)

(100) (200)

140 200 400 600

30
30 30 30 30

(70)
0 30 30 30 9

OBSERVATION: Lower BEP = Lowest X + net premium. Upper BEP = Highest X net premium. Maximum loss is Rs. 70 when market is stable. Maximum profit is Rs. 30 when market is volatile.

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SUMMERY
Strategies for Volatile Market:
Long Straddle, Long Strangle, Short Time Spread, Short Butterfly & Short Condor.

Strategies for Stable Market:

Short Straddle, Short Strangle, Long Time Spread, Long Butterfly & Long Condor.

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OTHER STRATEGIES
Box Spread is used for risk averse investors. Strap is used for volatile market with more chances of market advancing. Strip is used for volatile market having more downside bias. Protective put is used to hedge against down side risk inherent in the stock/index. Covered call writing is used to reduce the cost of our purchase.

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THANK YOU

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