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RAVI - IBA
Strategy 2: Synthetic
Long Call
Explanation
A trader is bullish in nature for short term, but also
fearful about the downside risk associated with it.
Here, a trader wants to hold an underlying asset
either in physical form like in case of commodities
or demat (electronic) form in case of stocks.
But he is always exposed to downside risk and in
order to mitigate his losses, he will buy 1 ATM or
OTM Put Option since ITM Put option will carry
more premium than ATM & OTM
Put options which are relatively cheap.
Explanation
A trader will short put if he is bullish in
nature and expects the underlying asset not
to fall below a certain level.
Risk: Losses will be potentially unlimited if
the stock skyrockets above the strike price
of put.
Reward: His profits will be capped by the
premium amount received.
*Risky Strategy
Construction
Buy shares in Cash/Futures Market
Buy 1 ATM Put Option
Sell 1 OTM Call Option
Strategy 8: Protective
Put
Explanation
Protective Put Strategy is a hedging strategy
where trader guards himself from the downside
risk. This strategy is adopted when a trader is
long on the underlying asset but skeptical of the
downside.
He will buy one ATM Put Option to hedge his
position. Now, if the underlying asset moves
either up or down, the trader is in a safe position.
Risk: Limited
Reward: Unlimited